The Fed and interest rates: Is another hike coming in December?

In this week’s special podcast edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Todd LaFountaine, program director, advisor insights, discussed the U.S. Federal Reserve (the Fed)’s meeting earlier this week, and whether a December interest rate hike is on the table.

Hawkish statements by Fed indicate potential December rate hike

The key takeaway for investors following the Fed’s Sept. 20 meeting is that while the federal funds rate remains unchanged for now, comments from Chair Janet Yellen signaled the Fed is still likely gunning for a rate increase in December, Ristuben said. “Yellen’s comments were more hawkish than markets expected,” he remarked, adding that the Fed has also said it’s willing to look past the country’s short-term weakness in inflation. In Ristuben and other Russell Investments strategists’ view, there’s a 50% chance of a rate hike in December.

The determining factor for whether or not this will occur, said Ristuben, is likely how the inflation numbers trend for the next three months. He noted that in August, the U.S. Bureau of Labor Statistics’ Consumer Price Index was up 1.9%, year-over-year—“a step in the right direction for the policies the Fed wants to implement,” Ristuben said. However, in his view, this needs to continue unabated for the next three months in order for the Fed to pull the trigger on a rate hike.

Germany goes to the polls Sunday—will Merkel remain at the helm?

Shifting to Europe, Ristuben noted that this Sunday’s federal election in Germany, in which voters decide whether Chancellor Angela Merkel earns another four years in office, hasn’t made headlines to the extent that other recent European elections did. In Ristuben’s view, the reasons for this are two-fold: first, Merkel is expected to easily defeat her chief opponent, Martin Schulz; and second, the nationalist political wave appears to have crested in Europe last year.

Referencing the Dutch and French elections earlier this year, Ristuben noted that in both instances, the nationalist party on the ballot didn’t wind up with a large portion of votes. Furthermore, he said, in the case of Germany, both Merkel and Schulz’s parties are strongly pro-European—and combined, they appear to be supported by roughly 58% of the voting electorate, per the latest polling data. “This means that the election isn’t about whether Germany will stay in the European Union or fundamentally change its policies—because too much of the vote appears to be going toward parties that support both of these measures,” Ristuben concluded.

Last chance for healthcare reform legislation in U.S.

Transitioning back to the U.S., Ristuben noted that next week marks the Republican party in the U.S. Congress’ last chance to pass healthcare reform legislation. This is because the government’s new fiscal year starts on Oct. 1—meaning that the budget reconciliation process under which the party has been moving the reform debate forward will expire. “There’s a lot of wood to chop politically to get this done,” Ristuben said, adding that from his vantage point, if the party is sufficiently motivated and united, legislation could potentially get passed.

Regardless of what happens around healthcare reform, Ristuben said, Congress’ full attention on Oct. 1 will move to corporate tax reform. U.S. House Speaker Paul Ryan is expected to unveil a general outline of what the plan for tax reform will look like early next week. In Ristuben’s mind, this will likely give investors a clue as to what the debate in Congress will center on for the rest of the year. However, he noted, “this will probably be more of a backburner issue next week as healthcare takes the lion’s share of the news.” Ristuben concluded by stating that he and other Russell Investments strategists are expecting some sort of corporate tax reform to get passed in early 2018—perhaps more modest than originally envisioned.