Don’t count on a Powell Pause.
That’s the message seasoned watchers of the Federal Reserve have for any investors hoping that turmoil in Turkey and the wider emerging-market selloff would stay the hand of Chairman Jerome Powell from raising interest rates.
While international developments did cause the U.S. central bank to hold back in 2015 and 2016, there are big differences between now and then. U.S. unemployment was higher and underlying inflation was lower. But perhaps more importantly, the nexus of the turbulence was China, whose economy is the world’s second largest and more than 10 times the size of Turkey’s.
“The broad conclusion from history is that the U.S. can generally ignore what happens in emerging markets, unless it involves China,” said Michael Gapen, chief U.S. economist at Barclays Plc and a former section head at the Fed Board in Washington.
Investors agree with that assessment. Despite fears of Turkish contagion, odds of a Fed hike in September were unchanged from a week ago at 90 percent, according to pricing in federal funds futures, with the probability of another move in December seen at roughly 55 percent.
Fed officials will “be concerned, they’ll be worried and they’ll be monitoring, but they’re not going to take any action on U.S. monetary policy until they expect that crisis to spill over in some substantive way into the U.S.,” said Robert Martin, U.S. economist at UBS Group AG who formerly ran an international capital markets section at the Fed.
So far, the fallout has been limited. While U.S. stock markets have wobbled in recent days in response to the turbulence in Turkey, they’re still near all-time highs. The emerging-market jitters have pushed up the dollar, which on the margin could crimp U.S. economic growth by making it more expensive for companies to export. But that potential drag has been partly offset by a fall in long-term interest rates.
“If you look at how Turkey is affecting U.S. financial conditions, at the moment you barely see it,” said Roberto Perli, a partner at Cornerstone Macro and a former Fed Board economist.
The U.S. economy looks poised to rack up another quarter of solid growth after expanding at its fastest pace since 2014 in the April-June period. Economists surveyed by Bloomberg News earlier this month raised their forecast for third quarter growth to 3 percent, from 2.8 percent in July. Gross domestic product climbed at a 4.1 percent pace in the second quarter.
A National Federation of Independent Business survey released Tuesday showed a gauge of optimism among U.S. small-business owners increased to the second highest on record as companies benefited from tax cuts and robust consumer demand.