The US Federal Reserve is likely to raise its rates in December, according to the latest thoughts from BNP Paribas Investment Partners’ Multi Asset Solutions chief economist Joost van Leenders, and CIO, head of TAA Colin Graham.
This is likely to remain the case whoever wins the highly contested US presidential and congressional elections, they add.
A key driver of the Fed will be the latest unemployment figures; which show both that unemplyment fell in October, but so did participation in the labour market.
“From a broader perspective, the fact that the unemployment rate has been roughly stable for a year and the participation rate has risen slightly could mean that the US economy is close to full employment,” van Leenders and Graham stated in a note.
“We think that this labour market is strong enough to allow the Federal Reserve to raise the fed funds rate by 25bp in December,” they added.
BNP Paribas IP discounts the fact that the Fed left rates alone at its last meeting for two key reasons: it was too close to the US elections, and there was no related news conference scheduled.
In terms of deciphering Fed statements, van Leenders and Graham said that the central bank has mentioned that it is not looking for evidence of inflation moving towards its target, but “some” evidence.
“Given that September’s decision to leave rates on hold was characterised in the meeting minutes as a close call, a rate rise in December now looks like the base case for the Fed. In other words, only a severe weakening of the data or heightened market volatility would keep it from raising rates.”
Touching on the US elections van Leenders and Graham said that recent volatility in the Vix index highlights just how much the outcome may affect markets.
The past weeks’ narrowing of the Clinton lead over Trump in polls saw risk assets sold off. When the FBI recently said it was re-investigating Clinton over emails, the Vix index “spiked almost as much as after the UK referendum in June”.
“When the FBI this weekend upheld its earlier conclusion that there was no case to prosecute Clinton, equity markets rebounded.”
“At this point, we think that a scenario with a Democratic victory and a Republican or divided Congress is now largely discounted by equity markets….Our main scenario with modest global growth and very gradual interest rate rises in the US should be positive for equities. With the risks skewed to the downside, we have maintained our cautious asset allocation.”