Don’t expect the Federal Reserve to raise rates when policymakers meet next week. The odds of a rate hike — which would be the first in nine years — have slipped to 28% from as high as 54% in early August, according to Bloomberg.
Brett Wander, chief investment officer of fixed income at Charles Schwab Investment Management, says in a new note that the recent stock market selloff “could be the deciding factor” for the delay. Federal Reserve Board Chair Janet Yellen is “terrified that equities will continue their selloff after a rate rise.”
Former Treasury Secretary and presidential economic advisor Larry Summers blogs in The Washington Post that the stock market rout “has already done the work of tightening” that a Fed rate increase would otherwise have done, and a rate hike now could potentially revive the selloff while also slowing an economy already experiencing slower growth in jobs and productivity and low inflation.
Three Wall Street-type economists addressing a meeting of the New York Financial Writers Association Tuesday night all agreed the Fed is not likely to raise rates when its policymakers meet next Wednesday and Thursday, but each predicted different dates for the move.
Jim O’Sullivan, chief U.S. economist for High Frequency Economics — dubbed “the most accurate forecaster of the year” by MarketWatch for 7 of the last 11 years including the past four — expects the Fed will move in October rather than September because even though “the economy looks solid, the Fed doesn’t want to take a chance and be blamed for another big selloff.”
O’Sullivan says a rate hike is justified this year because unemployment is falling rapidly — it fell to 5.1% in August — and wage growth and inflation, though subdued now, will pick up when the jobless rate falls below full employment. The Fed’s dual mandate is to promote maximum sustainable employment and stable prices. It does this by setting an unemployment rate that it expects to not accelerate inflation — currently between 5% and 5.2% unemployment — as well as a target inflation rate, now at 2%.
O’Sullivan said that wages and inflation may be low now but are likely to pick up as the unemployment rate falls further and the Fed may eventually have to lower its “full employment rate” target to 4%.
Bob Brusca, former chief of the New York Fed’s international financial markets division, now chief economist of consulting firm Fact and Opinion Economics, sees no reason for a Fed rate hike at all this year — at the October or December Fed meeting. “There’s no evidence of inflation anywhere … We’re creating a lot of jobs, but the quality of jobs is poor and the average hourly earnings rate of change is very slow.”