• U.S. and European central banks appear to have begun the gradual shift to policy normalization
  • A government shutdown was averted on September 30, but the more critical debt ceiling looms in the coming weeks
  • The updated Fed “dots” reveal a growing divide in expectations for necessary interest rate policy going forward, but the more hawkish regional Fed presidents have limited voting power relative to the Board of Governors
  • Supply chain disruptions have remained stubbornly persistent; labor market tightness remains at historically high levels

The gradual shift to policy normalization appears to have begun for the Federal Reserve and some of the largest foreign central banks. The September 22 FOMC official statement signaled that a November taper announcement is likely, and updated Summary of Economic Projections (SEP) revealed a growing rift within committee participants related to the timing and aggressiveness of future rate hikes (more on that below). The European Central Bank (ECB) and Bank of England (BOE) followed with somewhat hawkish rhetoric as well, referencing worries over potentially “sticky” inflation. Financial markets have also been giving attention to China’s economy and the likely failure of real estate giant Evergrande, looking for any signs of more systemic fallout. The budget debate in Congress is also front and center with Treasury Secretary Janet Yellen telling Congress on September 28 that she expects the government to run out of cash on October 18 if the debt ceiling is not lifted.

Senate Republicans blocked House-passed legislation on September 27 that would have funded the government into December and suspended the debt ceiling until the following December, after mid-term Congressional elections. Republicans prefer to separate the debt ceiling suspension from the government funding legislation so that the former could be used as a negotiating tool in Democrats’ larger $3.5 trillion budget reconciliation plan. Congress was able to pass short-term legislation to fund the government through early December, but the debt ceiling still looms. A technical default would obviously be a dangerous scenario, and although we have witnessed multiple debt ceiling standoffs over the last decade, even a remote possibility of a U.S. default still fosters some investor consternation, particularly from overseas buyers.

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