United States: September rate hike less certain amid concerns over global financial market volatility
August 31, 2015
Just a few months ago, an overwhelming majority of market analysts and investors were predicting that the Federal Reserve (Fed) was firmly on track to make an initial interest rate hike in September. However, incoming data on the U.S. economy and unsettling global developments, particularly in China, have prompted some to push out their expectations. The Fed has repeatedly emphasized that its decision to hike rates depends on the assessment of a wide range of information. Given that the U.S. economy faces a number of headwinds, it is possible that the Fed well err on the side of caution once again and postpone a move until later this year or even until 2016.
Recent data paint a mixed picture of the domestic economy. Economic activity continues to move along at a reasonable pace, with GDP accelerating significantly in the second quarter, and unemployment has returned to pre-recession levels. However, wage growth is largely stagnant and inflation remains well below target. Moreover, the steady appreciation of the U.S. dollar against other currencies and subdued global growth do not bode well for exports and the U.S. economy as a whole going forward. Looking abroad, the situation is much more complicated. Weak incoming data and recent moves by authorities in China have stirred up major concerns about the real state of the Chinese economy. In fact, the U.S. stock market has been on a tumultuous path in the past couple of weeks amid fears that volatility in Chinese and other major global markets may drag on growth.
Minutes from the Fed’s policy meeting in July suggest that committee members were becoming more convinced about making a move this year. However, developments in recent weeks and the potential that economic malaise in China may spill over appears to be driving some policy makers to reconsider. At a press conference on 26 August, William Dudley, the influential President of the Federal Reserve Bank of New York, stated that, “at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago. But normalization could become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing and more information on international and financial market developments, all of which are important in shaping the U.S. economic outlook.” Although a rate hike in September is still the most likely scenario, Dudley’s statement reinforces the notion that this is not a guarantee.
Author: Carl Kelly, Economist