The One FOMC Wild Card Probably Flying Under Your Radar

Only a few weeks ago, a growing majority seemed to think that a September rate hike by the FOMC was inevitability. My, how things have changed.

In a new note out this week, Citi Research analyst William Lee takes a look at how the past week of market instability has affected the potential for a September hike. Lee also mentions one major “wild card” that remains up in the air.

China’s influence
It’s no secret that the primary source of the recent global market turbulence has been China. However, Lee believes that China, as a stand-alone entity, would have very little influence on the FOMC rate-hike decision. “Our trade links with China and Asia in general are too small to influence the Fed’s decision unless there is spillover into the rest of the world that induces a global recession,” Lee explains.

September hike remains on the table
Despite recent worries, Lee sees the behavior of global markets in response to China as closer to a “slow burn” than a “free-fall.” He sees enough stability in global equity markets and key economic data to keep a potential September rate hike in play.

Wild card
Lee points to Stanley Fischer’s upcoming speech at the Jackson Hole conference on August 29 as the major wild card when it comes to a potential September hike. "If he shows signs of worrying that the transitory downward pressures (commodity and energy prices and the appreciating dollar) are feeding through and becoming entrenched in wages and domestic prices—THAT would be a big event,” he writes.

Lee believes that any language of this nature from Fischer would be a strong indicator that a September hike could now be off the table.