With equity markets crashing around the world, the Federal Reserve will likely delay its much anticipated interest rate increase from next month to December, or so went the consensus at a Charles Schwab & Co. fixed-income roundtable in Manhattan on Tuesday.
“We came into the year believing that the Fed would raise rates by 25 basis points in the second half of the year,” said Kathy Jones, senior vice president and chief fixed-income strategist at the Schwab Center for Financial Research. “We were Septemberists for the longest time. However, we now see a slow progression of interest rates as Janet Yellen has now articulated.”
However, the recent disasters in the stock market “makes it less likely” that rates will rise next month,” Jones said. “I don’t think it makes it impossible, but it’s very unlikely as we see a lot of turmoil, the kind of turmoil that produces collapsing commodity prices.”
Another factor making the Fed pause, she added, are the Chinese market’s woes coupled with the revaluation of its currency––factors that Schwab officials said amounts to an exporting of deflation.
Jones said the economy’s slow-growth environment means the Fed will try to avoid deflation. She predicted it will delay the long-expected rate hike that would finally take the federal funds rate away from near zero for the first time in years. The Fed, she added, previously has signaled several times that it wanted to raise rates in September. Still, raising them now in the midst of a market meltdown would be “strange.”
That was a sentiment shared by another panelist, who argued the recent market news had changed expected Fed policy.
“When China came out and publicly devalued its currency by two percent, it pushed our thoughts a little out toward December,” said Jonathan Heckscher, senior vice president and fixed-income director at Pennsylvania Trust.
“What they [the Chinese] did took the place of what was likely to happen in September,” according to Heckscher.
The American stock market, he added, still hadn’t priced out the chance of a Fed rate hike. He added that Congress coming back next month from its summer recess could block the Fed from rising rates in the short term. If there is no further market blowups, Heckscher argues, then rates will rise in December. “But I can’t see September. September is off the table,” he added.
Still, investors spooked by markets are demanding more information now, according to one financial advisor.