Market woes expected to delay Fed hike

Global stock markets continued down a volatile path Wednesday as US equities soared but Chinese shares fell modestly. Worries about the economic slowdown in China, the prospect of an interest rate increase in the United States and slumping commodity prices have combined to reinforce fears that the world economy might be on weaker footing than previously thought.

All the turmoil has caused some speculation that the Federal Reserve, seen to be on track to raise US interest rates soon, may delay the move.

William Dudley, the president of the Federal Reserve Bank of New York, said Wednesday that international developments "do have relevance" for the US economic outlook and that a rate increase at the Fed's September meeting is "less compelling". However, Dudley left the door open for a move at the US central bank's meeting in December.

Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington, believes that the Fed will stay on the sidelines next month.

"The US will be out of step with the rest of the world, especially emerging markets, including China, if it 'pulls the trigger' in September and prompts another round of currency devaluation," he said. "US hawks are calling for a 0.25 percent short-term rate, but I don't think the Fed will oblige."

Jack Liu, senior vice-president of Chardan Capital Markets in New York, also believes the Fed may hold off. "(The) Federal Reserve has demonstrated in the last two years it is weighing a lot of global factors and taking a very prudent position on raising interest rates in the US.

"Given the Chinese market is collapsing with no signs of stabilizing in the near term, I will be surprised if the US will rush on any decisions to change its current course on interest rates," he said.

Noting that the People's Bank of China on Tuesday trimmed interest rates for the fifth time in nine months, Sung Won Sohn, a professor of economics at California State University Channel Islands in Camarillo, California, urged the Fed " to do its part by implying that the lift-off won't occur this year. There is no need to rock the boat in turbulent waters," he said.

The Shanghai Composite lost 1.27 percent to 2,927.29 on Wednesday. In the US, the Dow Jones industrial Average rose 619.07 to 16,285.51. The Nasdaq Composite also moved sharply higher, gaining 191.05 to settle at 4,697.54.

Does the market turbulence in China have an effect on the US economy, and could it derail the US economic recovery?

"China's stock market turbulence doesn't have much of a direct effect on the US real economy, but obviously it affects US financial markets," Hufbauer said. " I don't think the US has entered a bear market, but if it has - thanks to events in China - that will put downward pressure on the US real economy."

"The main culprit of the current market turbulence in China is the hyper leverage of the main economy," Liu said. "The problem is not new, but clearly it is becoming a lot more pronounced as the market is collapsing.

"Because this is more of a domestic problem for China, I don't think the US economic recovery is going to be hit hard significantly," he said. "The US stock market has had some good runs in the last five to six years. It is long overdue for some correction itself."

China's market decline is likely to curtail US investor interest in shares of Chinese companies.

Hufbauer described US investor interest in Chinese equities at "approximately zero" right now.

paulwelitzkin@chinadailyusa.com