The Fed Could Still Surprise in September

Yellen, cc Flickr Day Donaldson

Just as a consensus seemed to be emerging that the US Federal Reserve would raise interest rates at its upcoming September 16-17 meeting, a week of broad swings in global equity markets has once again cast doubt on the timeline for rate normalization.

The story is well-known at this point. Chinese equity markets have come crashing down to earth after a year of froth and, more importantly for global markets, there has been a slew of weak data pointing to a slowdown in the world’s second largest economy. This combined with a predictable plummet in energy prices resulted in a volatile few weeks for US equities. Currently the Dow is off around 7% from where it stood on August 18, and this taking into account the modest recovery that played out in Wednesday trading.

This may end up putting the skids on a September rate hike by Yellen and company. Despite a procession of strong data from the US economy – the latest being the Fed’s own Beige Book that saw much-anticipated wage growth across several industries – choppy equity markets and fears over the extent of China’s slowdown will create pressure to put off the hike yet again, pushing it back to the Fed’s meeting in December.

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