After Summer Slumber, Volatility is Back

The U.S. stock market is facing a dilemma based on mixed information and an uncertain political landscape. On the one hand, economic data is neither weak nor strong enough to make the choice to raise interest rates easy for policymakers. On the other hand, the unpredictable nature of the presidential race is contributing to market volatility. Though Fed economists have repeatedly stated their intentions to raise rates again soon, no one is certain about the timing of the next hike.

The Federal Reserve's Open Market Committee will meet this week to decide whether or not to raise interest rates for the first time since December 2015. The Fed has a dual mandate: to maximize employment and keep inflation stable. Headline unemployment is below the Fed's target of 5.0%, but inflation has remained stubbornly below the Fed's long-run goal of 2.0%.

Fresh inflation data suggests a increasing trend. Two measures of inflation, the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) deflator, rose in recent months, indicating that the economy is getting closer to the Fed's target. While the increase in inflation might give pro-hike Fed economists ammunition at this week's meeting, many analysts still don't think the Fed will immediately raise rates until after the elections.

Even though markets have still been pushing new highs recently, it wouldn't surprise us to see a return to a more volatile pattern in the days and weeks ahead, especially since September and October typically experience higher than average volatility in most years. Uncertainty around economic growth, the November elections, Federal Reserve activity, and a future British exit from the EU could cause investors to become more cautious in the weeks ahead.

We'll be closely monitoring the overall market climate and will keep you informed as always.

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