Brexit does not appear to have significantly affected the U.S. economy. Financial conditions did not tighten as equity prices are up, interest rates are low and the trade-weighted dollar is up only slightly. Outside of the United Kingdom, global economic data also do not yet point to a material impact. These developments justify the Fed’s policy statement following the July meeting that “near term risks to the economic outlook have diminished.” Most importantly, the Bank of England has put in place a strong package of monetary policy support that reinforces this view.
The 10-year U.S. Treasury note is trading around 1.58%, up from a low of 1.37% following the Brexit referendum. The force of U.S. economic fundamentals has prevailed after transitory concerns about the fallout from Brexit.
The mix of recent economic data and global economic developments present a stronger case for a higher policy rate when the FOMC meets in September. But we continue to think a raise at the December meeting is more likely. Markets await Janet Yellen’s speech at the Jackson Hole symposium at the end of August, in which she is expected to offer an updated slant on global conditions and monetary policy.
Carl Tannenbaum is the chief economist for Northern Trust.
Asha Bangalore is senior vice president and economist at Northern Trust.