Date
23 May 2017
The era of easy money is not quite over yet, with the Federal Reserve expected to hold off on plans to raise interest rates amid turmoil in global financial markets. Photo: Internet
The era of easy money is not quite over yet, with the Federal Reserve expected to hold off on plans to raise interest rates amid turmoil in global financial markets. Photo: Internet

September US rate hike unlikely amid market turmoil

A widely expected September liftoff for a US interest rate hike is looking increasingly unlikely amid turmoil in world financial markets.

Fears are growing about a China-led global economic slowdown after an 8.5 percent plunge in Chinese stocks triggered a global rout on Monday.

The Federal Reserve has hinted at a September tightening of US benchmark rates after eight years of near-zero interest rates.

Monday’s rout, which follows weeks of jitters over the extent of China’s economic troubles and their effect on the rest of the world, convinced investors that the Fed would hold off until some semblance of calm returns, Reuters reports.

“You would be insane to raise interest rates when markets are in such turmoil,” said Martin Barnes, chief economist at BCA Research in Montreal.

Compared with last week, investors now see a much lower chance the Fed will hike at its Sept. 16-17 meeting.

Prices for swaps on Wall Street implied traders saw a 24 percent probability for a September move, down from 46 percent a week earlier, according to Tullett Prebon data.

The market sell-off and jump in the dollar appear to have given pause to at least one Fed policymaker.

Atlanta Fed president Dennis Lockhart, who two weeks ago was “very disposed” to begin policy tightening in September, on Monday said only that it was likely to occur “sometime this year.”

Barclays now expects the rate hike will not come until March, after having previously pointed to September.

And BlackRock Inc’s chief investment officer for fixed income, Rick Rieder, told Reuters that even though he hoped the Fed would move next month, market volatility was making it difficult.

Investors have scaled back their own bets on long-term US inflation.

The market gauge of those expectations — the yield spread between 10-year Treasuries and 10-year Treasury Inflation Protected Securities — hit a seven-month low on Monday, suggesting investors see inflation of around 1.5 percent over the next decade, well below the Fed’s 2 percent target.

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CG/RA

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