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Wave Goodbye to a September Rate Hike: Fixed Income Experts

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As August nears its end and September grows ever near, the question still remains: Will the Federal Reserve raise interest rates at its September meeting?

Many of the experts who were singing to the tune of a September rate hike have since changed their tune.

One of those self-professed “Septemberists” was Kathy Jones, senior vice president and chief fixed income strategist for Schwab Center for Financial Research.

“Our viewpoint coming into 2015 was that the Fed would indeed raise interest rates 25 basis points at some point in the second half of the year,” she said during a discussion with media on Tuesday morning in New York. “We were Septemberists for the longest time.”

Jones now sees a September rate hike as “unlikely.”

“We were pretty firmly in the September camp, up until very recently,” she said. “I don’t think it completely eliminates the possibility, but I think it makes it very difficult if we continue to see a lot of turmoil, particularly the kind of turmoil that produces deflationary pressures like continued collapse of commodity prices, decline in markets globally. Then, I think it would be a very strange time to be tightening monetary policy in September.”

The pending rate hike would be the Fed’s first increase since 2006, and rates have been sitting at near zero for more than six years after.

As much as I think [the Fed] expressed that they want to, I think it’s going to be very difficult to do it [in September] and they’ll probably have to postpone it,” Jones said.

Jonathan Heckscher, senior vice president and director of fixed income for Pennsylvania Trust, had also been looking at September as a “likely rate hike,” but he now thinks December is much more likely.

“We changed that once we got the devaluation of the yen. When China came out and further publicly devalued by 2%, that sort of pushed our thoughts a little more out toward December,” Heckscher said during a discussion with media on Tuesday morning in New York. Adding, “I think that September is pretty much off the table right now. We would really need to stabilize the financial system right now and quickly for that to happen.”

Former Treasury secretary Lawrence Summers also came out with a statement on Tuesday questioning the Fed’s potential move in September.

“Raising rates in the near future would be a serious error that would threaten all three of the Fed’s major objectives — price stability, full employment and financial stability,” Summers said in a column in the Financial Times on Tuesday.

Heckscher also warns that the upcoming political landscape could cause the Fed to delay its rate hike.

“I think one of the other factors that is hidden behind the scenes also is the political landscape could end up forcing the Fed’s hand not to move in September,” he said. “On Sept. 8, Congress returns from their summer vacation and they have 10 legislative days at that point to pass a budget.”

A similar thing happened in September 2013 as the Fed was on the cusp of announcing its tapering and winding down of quantitative easing, Heckscher said.

“Congress all of a sudden starts to fight [and it] looks like they’re going to have a shutdown,” Heckscher said. “And the Fed was explicit saying it was that shutdown that they sort of had to wait, and it was in December that they moved.”

With Planned Parenthood and education on the table, Heckscher thinks there could be “some very big battles” that could lead to a shutdown.

“I don’t see regardless of how the market has it priced, I don’t see the Fed making a move into a potential government shutdown,” he said.

Unless there’s further instability in the market, Heckscher says he’s confident of a December rate hike.

“With employment where it is and I think there is a little bit of wage growth that is coming back into the market, I think it’s reasonable to think that the Fed will still likely move in December,” he said.

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