A top Federal Reserve officialhas damped expectations that the central bank would raise US interest rates next month, highlighting how the turmoil that has spread from China to global markets is rattling policymakers.
William Dudley, head of the New York branch of the Fed, told a conference that it was “important not to overreact to short-term market developments” but conceded that the argument for tightening monetary policy as early as September “seem[s] less compelling to me [now] than it was a few weeks ago”.
“International developments have increased the downside risk to US economic growth somewhat,” he said, citing China’s economic slowdown, falling commodity prices, strains on emerging markets and the resulting “financial market volatility”.
He was speaking after days of steep slides in Chinese shares, which have lost half their value since mid-June amid mounting evidence of a slowdown in the world’s second-largest economy. The declines have spread alarm across global equities, commodities and foreign exchange markets.
The turmoil seen on Monday had eased yesterday, but markets remained volatile. The FTSE Eurofirst 300 saw big swings and closed down 1.9 per cent. China’s Shanghai Composite index also dropped 1.3 per cent, a day after the People’s Bank of China cut interest rates and pumped liquidity into the banking sector by reducing the reserve requirement ratio for big banks.
Earlier this summer most economists were predicting that the Fed would raise rates in September for the first time in almost a decade.
But market expectations of a hike next month are fading fast, with Barclays economists shifting their forecasts to March next year.
Mr Dudley said he still hoped the Fed could raise interest rates by the end of the year, noting a move would be a sign of confidence in the US economy. He added that new data could yet make a September hike “more compelling”.
“I really do hope we can raise interest rates this year . . . But let’s see how the data unfold before we make statements about when that might occur.”
Dennis Lockhart, the president of the Atlanta Fed, said on Monday he still expected interest rates to rise this year but Mr Dudley is the first Fed policymaker to speak in such detail since the global stock market sell-off.
Jeffrey Gundlach, the head of DoubleLine, a big bond fund manager, said that there was “no way” the Fed will lift interest rates this year. “There are some people that still think the Fed could hike in September. I think that’s a ridiculous assumption, given what is going on in financial markets,” he told the Financial Times. “I think we should be very worried about China. It’s a very big deal.”
By KADHIM SHUBBER AND
ROBIN WIGGLESWORTH
