The Gradual Shift To Policy Normalization Begins

Look beyond the headlines to discover the driving forces behind market trends and consider how they impact a credit union’s investment portfolio.

The gradual shift to policy normalization appears to have begun for the Federal Reserve and some of the largest foreign central banks. The Sept. 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. The European Central Bank (ECB) and Bank of England (BOE) followed with somewhat hawkish rhetoric as well, referencing worries over potentially sticky inflation.

September Takeaways

  • U.S. and European central banks appear to have begun the gradual shift to policy normalization.
  • The U.S. government averted a shutdown on Sept. 30, but the 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.

Financial markets have also been giving attention to China’s economy where real estate giant Evergrande is likely to fail and looking for any sign of more systemic fallout. The budget debate in Congress is also front and center with Treasury Secretary Janet Yellen telling Congress on Sept. 28 that she expects the government to run out of cash on Oct. 18 if the debt ceiling is not lifted.

Senate Republicans blocked House-passed legislation on Sept. 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 to use the former as a negotiating tool in Democrats larger $3.5 trillion budget reconciliation plan. Congress passed short-term legislation to fund the government through early December, but the debt ceiling still looms.

A technical default would be a dangerous scenario. Although we have witnessed multiple debt ceiling standoffs over the past decade, even a remote possibility of a U.S. default fosters some investor consternation, particularly from overseas buyers.

This market commentary is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Visit to read about the latest economic data and overall market trends.

October 18, 2021

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