Fed gets new excuse to not raise rates

August 25 05:03 2015

The stock market’s stomach-churning volatility could be just the thing to let the Federal Reserve off the hook. Some wonder if the stock market’s sudden turbulence raises enough doubt about the economy to hold off the Fed even longer and back away from taking up short-term interest rates in the upcoming September meeting.

Futures markets indicate investors bet there’s a 24% chance the Fed will boost short-term rates in the September meeting – down from the 45% odds earlier last week, according to tracker Tullett Prebon. “If you continue to see significant (stock market) volatility and weakness leading up the the meeting, it becomes easy to have one more reason for delaying (a rate hike),” says Jay Mueller of Wells Capital Management. But he point out there’s plenty of time before the meeting “and if there’s stability, the market doesn’t have to be a major factor.”

Investors, too, are showing their faith in a rate hike is sinking a bit. The yield on the 10-year Treasury fell 1.1% to 2.03% Monday.  The Federal Reserve could provide further clues on when it plans to begin raising rates this week at its annual symposium in Jackson Hole, Wyo. later this week. Fed Vice Chair Stanley Fischer is scheduled to speak Saturday about inflation. The meeting “will attract even more attention than normal,” writes Paul Ashworth, chief economist at Capital Economics in a note to clients. In an article in the Financial Times Sunday, former Treasury Secretary Larry Summers said the Fed should not raise rates “in the near future,” arguing that would be a “serious error that would threaten all three of the Fed’s major objectives – price stability, full employment and financial stability.”

He said higher rates would further push down inflation, make it more costly for employers to invest and hire and strengthen the dollar, hurting US exports. For some investors, the market confirms what they already thought – a rate hike isn’t in the cards anytime soon. A majority of investors have thought the Fed wouldn’t move in September all along, says Marilyn Cohen of Envision Capital Management. Commodity price declines and the lack of inflation in the economy are the reasons why Cohen has thought, and continues to believe, the Fed isn’t going to touch rates anytime this entire year, she says. If the Fed doesn’t move in September, some stock investors might think it’s because of the stock market jitters. But that’s just one variable the Fed is considering, and not even a very important one, she says.