Global Economic Perspective: October

Drivers of Solid US Economic Expansion Remain in Place

Recent data have supported our view that the drivers of the US economy’s solid expansion remain in place, and should allow the Fed to move further toward its goal of normalizing interest rates. Some data releases have clearly been skewed by the recent major hurricanes, but we feel any negative impact on the economy is likely to be transient and outweighed by demand arising from reconstruction.

Persistently low inflation has shown little sign of picking up, although it should be remembered that the United States shares this characteristic with many other major economies. As we have argued before, structural factors may mean prices take longer to respond to the current higher levels of activity than would normally be expected at this point in the economic cycle.

September saw a turnaround in sentiment among market participants about the likelihood of another rise in US interest rates before the end of the year, which was also reflected in moves in the Treasury market. Initially, investors were skeptical about any further tightening of monetary policy in coming months, amid escalating tensions between North Korea and the United States, further soft inflation data and uncertainty about the potentially negative effects of hurricanes Harvey and Irma on the economy. Early in September, federal funds futures declined and suggested only about a 30% probability of an interest-rate hike in December. Benchmark Treasury yields fell close to 2%, their lowest level thus far this year.