October Rate Hike Still a Possibility but Not Likely

October 26,2015

The focus in financial markets will be on the U.S. central bank when members of the Federal Open Market Committee meet for two days this week (October 27-28) - to determine if the U.S. economy is healthy enough to raise interest rates. Interest rates have been at record lows since the global financial crisis of 2008. But analysts say despite the improving health of the U.S. economy, it remains vulnerable to the downside risks from external forces, particularly slowing growth in China.

Beijing's official figures suggests China’s economy is growing at close to seven percent – but very few people actually believe that. Richard Hunter is head of equities at London investment firm Hargreaves Lansdown.

“Indeed some of the companies who do business in China are tending to suggest that the growth rate may be nearer half that sort of figure," said Hunter.

That uncertainty is partly responsible for renewed concerns about the impact of slowing Chinese demand on the U.S. economy. Despite a much improved job market, a high dollar exchange and low inflation makes the U.S. more vulnerable to external risks, says Federal Reserve governor Lael Brainard who spoke recently to the National Association for Business Economics.

“Given the downside risks, we would be wise to continue to carefully nurture the U.S. recovery. And we should be cautious in prematurely taking away the support that has been so critical to its vitality," said Brainard.

The Fed has not ruled out a modest rate hike this year, but N.A.B.E. president Lisa Emsbo-Mattingly says the U.S. central bank may have added to the uncertainty by going beyond its domestic goals of full employment and stable prices.

“They [the fed] added sort of a third element which was the international element and I think that the markets had a lot of difficulty digesting that. And there’s a concept of ambiguity that I think the Fed may have introduced into the market unintentionally," said Emsbo-Mattingly.

Some analysts say an October rate hike remains a long shot - leaving the door open for the Fed's next meeting in December. But in an inter-connected global economy, experts say much will depend on the stability of emerging markets - even for the world's largest economy.