Coverage: Federal Reserve rate hike thrown into question, maybe

With markets everywhere in turmoil, people are ramping up speculation about the ever-illusive question — will the Federal Reserve still raise interest rates in September?

It’s a hotly debated topic and never seems to result in an actual answer, so as Fed members and other central bankers come together for an annual retreat, reporters are left searching for answers.

Ylan Mui and Jim Tankersley of The Washington Post discussed why rumors are mounting that the Federal Reserve won’t hike interest rates:

The Federal Reserve had expected to begin withdrawing its support for the nation’s economic recovery this year, but mounting evidence of a global slowdown could extend the era of easy money.

Fed officials have signaled for months that they are getting closer to raising the central bank’s target interest rate for the first time in nearly a decade. Many investors had anticipated the milestone would come when policy­makers meet in September.

But that timeline is now unlikely. Traders have slashed the odds of a rate increase next month. And a growing list of prominent economists say the central bank is not ready to let the American recovery stand on its own.

“When our growth has been as volatile as it has been, when the stock market has been as volatile as it has been . . . [raising rates now] would be undertaking undue risk,” Nobel Prize-winning economist Joseph Stiglitz said in an interview Tuesday.

The ending of the Fed’s stimulus has the potential to roil financial markets already bruised by the slowdown in China. Meanwhile, a spike in inflation, stemming from the central bank’s ­ultra-low interest rate, is a distant threat.

The Fed is not the only central bank under pressure. Policymakers around the world are confronting increasingly vocal calls to do more — not less — in the face of mounting fears of a global economic slowdown. China cut a key interest rate Tuesday for the fifth time in nine months and reduced the amount of reserves that banks are required to hold, moves intended to pump more money into its economy. The European Central Bank may be forced to increase its massive stimulus efforts, analysts say.

But New York Times writer Binyamin Appelbaum described how reports that the impending rate hike will be delayed might not be accurate:

As markets quake and stock prices fall, investors increasingly are betting that the Federal Reserve will not raise interest rates this year.

Their conclusion is a striking rejection of the Fed’s stated plans — and it appears premature.

The Fed watches financial markets closely, of course. Investors are losing money they might have spent, and falling prices can be an indicator of broader economic problems.

But the losses so far probably aren’t big enough to crimp growth, and officials have plenty of time to see what happens next. The Fed’s policy making committee doesn’t meet until mid-September, and it has two more meetings scheduled later this year, in October and December.

“I expect the normalization of monetary policy — that is, interest rates — to begin sometime this year,” Dennis P. Lockhart, president of the Federal Reserve Bank of Atlanta, said in a calming speech that he delivered in Berkeley, Calif., on Monday as the closing bell rang in New York, ending another ride on the market roller coaster.

The volatility of financial markets over the last few days contrasts with the stability of domestic economic growth over the last several years. The Fed is focused on that broader picture, and while the pace of growth remains sluggish by past standards, central bank officials have suggested repeatedly that they regard it as good enough.

Mr. Lockhart noted some of the factors that are roiling markets, including the rise of the dollar, China’s currency devaluation and falling oil prices. But he said the Atlanta Fed expected the economy to continue its expansion, including adding jobs.

“The current bout of market turmoil, if it continues, might persuade the Fed to hold off on raising interest rates in September,” Paul Ashworth, chief North America economist at Capital Economics, wrote on Monday. “Since that volatility doesn’t reflect any genuine economic slump, however, we wouldn’t be surprised if it proved short-lived, leaving the way open for the Fed to begin raising rates at some point this year.”

The Wall Street Journal’s Jon Hilsenrath wrote about the Federal Reserve’s retreat this weekend, pointing out the numerous topics it will have to mull over:

Global central bankers are preparing to converge this week for the Federal Reserve’s annual retreat in Jackson Hole, Wyo., with a new economic mess on their hands.

Gathering at the mountain getaway in recent Augusts, the stewards of global currency have contended with the looming collapse of Lehman Brothers in 2008, global deflation worries in 2010, serial Greek fiscal meltdowns and other dramas. This time, they confront a big disparity between the world’s two largest economies, the U.S. and China.

The U.S. has recovered enough from the last financial crisis that Fed officials have been preparing to raise interest rates to prevent overheating down the road. But China appears to have lost economic momentum, driving the People’s Bank of China to cut rates and take other measures to boost growth. Markets have responded to these conflicting forces with turbulence, creating new uncertainties for policy makers about the economic outlook.

Before this week’s turmoil, Fed officials had signaled they might move as soon as next month to start lifting their benchmark interest rate from near zero, where it has been since December 2008. It was shaping up to be a tough decision even before the stock-market corrections around the globe. Now, the odds of a rate increase in September appear to have diminished, though a move is still possible if markets stabilize and new economic data show the U.S. economy is strengthening despite threats abroad.

New reports on Tuesday showed increases in U.S. consumer confidence and new home sales in August and July, respectively, reasons for Fed officials not to become too glum about the U.S. outlook.

“Prior to these market events in the last few days, I thought that this was about as close to a 50/50 call as you can get,” said former Fed Vice Chairman Alan Blinder of the odds that the central bank would raise U.S. rates in September. If markets don’t stabilize, he said, the Fed would likely hold off on a rate increase.

“If the markets are in anything close to the sort of tizzy they have been in the last few days, then the Fed will not throw a match into the fire” when it meets September 16-17, said Mr. Blinder, a Princeton University professor and friend of Fed Chairwoman Janet Yellen.

Ms. Yellen will not be attending this year’s Jackson Hole conference, but Vice Chairman Stanley Fischer is scheduled to deliver remarks there Saturday on inflation. European Central Bank President Mario Draghi won’t be there, but the ECB and many of the world’s other central banks will be represented by senior officials. The meeting has included top central bankers from Turkey, Malta, Sweden, South Korea and beyond in the past.