Market turmoil may delay Fed rate hike

 Market turmoil may delay Fed rate hike



Specialist Frank Masiello is reflected in his screen on the floor of the New York Stock Exchange, Monday, Aug. 24, 2015. U.S. stock markets plunged in early trading Monday following a big drop in Chinese stocks. (AP Photo/Richard Drew)

Screens from the New York Stock Exchange on Monday, the day markets plunged, are pictured.

Updated


Janet Yellen’s job just got a lot harder.

The Federal Reserve chair has been suggesting for months that this is the year she and the rest of the team at the central bank will finally begin bringing interest rates up from the historic lows where they’ve been since the 2008 financial crisis.

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But the wild market swings Monday amid fears of an economic slowdown in China may have shattered the Fed’s carefully laid plans for an increase in the main borrowing rate as soon as September. The S&P 500 stock index was down by 3.9 percent Monday afternoon, and the Dow Jones Industrial Average fell by 3.6 percent — almost 600 points.

“It would be hard for the Fed to hike in September,” Allianz chief economic adviser Mohamed El-Erian said. “The short-term risks would be too high, especially given the ongoing slowing of the global economy.”

As stock prices gyrated on Monday, the White House sought to calm fears by touting the “strength and resiliency” of the U.S. economy. The Treasury Department, which is monitoring global markets, declined to comment.

The Fed also wouldn’t comment. But many are speculating about what the central bank may do.

Atlanta Fed President Dennis Lockhart, a voting member of the Fed’s monetary policy committee, said Monday that he still expects a rate increase in 2015. Lockhart said he thinks investments and wages in the U.S. will pick up.

“Consistent with this picture, I expect the normalization of monetary policy — that is, interest rates — to begin sometime this year,” Lockhart said in remarks prepared for a speech in California. “I expect normalization to proceed gradually, the implication being an environment of rather low rates for quite some time.”

If the central bank doesn’t raise rates in September, it could still do so at the committee’s December meeting.

The Fed has kept interest rates near zero for nearly seven years to boost lending and spur on the economy. But as the U.S. economy has improved — and with mounting fears of inflation — Yellen and others at the Fed have said it’s time to end their easy-money policies. The bank is also under pressure from Republicans in Congress who’ve been complaining for years about the Fed’s low rates.

How to raise borrowing costs without spooking the markets has been Yellen’s biggest challenge. That’s why she’s been carefully hinting that everyone can expect it to happen.

Now she’s even getting pressure to change course from the man who was once her main competition for the Fed’s top job: former U.S. Treasury Secretary and Obama adviser Larry Summers.

Raising rates in the near future would be “a serious error,” Summers wrote in The Financial Times on Sunday. “The Fed does not have to do the job. At this moment of fragility, raising rates risks tipping some part of the financial system into crisis, with unpredictable and dangerous results.”

In their recent monthly meetings, members of the Fed’s rate-setting committee have raised concerns about the slowdown in China and turmoil in the stock market there, but they have waited to see what the effects would be on the U.S. economy before giving any indications how they would act.

Barclays Capital analysts said in a note Monday afternoon they now expect the Fed to beginning raising its rate in March 2016. The analysts said they expect officials will want to see if the recent volatility in the market will settle down. El-Erian, meanwhile, predicted the first step toward normalizing interest rates was shifting to December.

Economists stressed that the rise and fall of Monday’s trading, while alarming for those monitoring their retirement accounts, does not indicate the U.S. economy is in trouble.

“Since that volatility doesn’t reflect any genuine economic slump, however, we wouldn’t be surprised if it proved short-lived leaving the way open for the Fed to begin raising rates at some point this year,” Capital Economics Chief U.S. Economist Paul Ashworth said in a note Monday.

The market will next take a cue from a Saturday speech by Fed Vice Chair Stanley Fischer.

Peppered with questions about the market volatility in a press briefing Monday, White House spokesman Josh Earnest declined to speculate on how it could affect the Fed’s decision on rates.

“We should just be calm with what is happening in world markets,” Senate Minority Leader Harry Reid (D-Nev.) said in Las Vegas. “The problem is not in America, the problem is in China.”

Jennifer Liberto, Patrick Temple-West and Andrew Restuccia contributed to this report.





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