Market turmoil casts doubt on timing of Fed rate hike

WASHINGTON - Turbulence in financial markets and the shaky global economy are casting doubt whether the Federal Reserve will take the landmark step of raising its short-term interest rate next month.

The nation's central bank slashed the rate to nearly zero during the darkest days of the financial crisis and has kept it there since in an effort to ramp up the recovery.

For months now, its officials have been signaling they plan to soon hike the rate for the first time in nearly a decade - assuming the economy performs as expected.

But there is mounting evidence that assumption is not panning out. Several analysts said this week that they now believe the Fed won't move until the last minute this year, or even next year.

'U.S. financial market conditions have deteriorated in recent weeks and the pace of deterioration has accelerated in recent days,” Barclays chief U.S. economist Michael Gapen wrote in a research note, changing his prediction from a move in September to March instead. 'We believe the Federal Reserve is unlikely to begin a hiking cycle in this environment for fear that such a move may further destabilize markets.”

To be sure, U.S. consumer confidence hit a seven-month high in August and new single-family home sales rebounded in July, suggesting underlying strength in the economy. That could still allow the Federal Reserve to raise interest rates sometime this year.

The target interest rate set by the Fed is the very short-term rate it charges banks that deal with it. It is separate from the longer-term rates financial institutions set for home mortgages and car loans. But the low rates are intended to stoke consumer demand for such things, and for business investment to create jobs.

It was an aggressive and controversial response to the worst economic downturn since the Great Depression - and, in many ways, it has been a success.

The Fed's easy-money policies have been credited with fostering a more robust job market. Businesses are hiring, and the national unemployment rate, which stands at 5.3 percent, is nearing what many economists believe is its lowest sustainable level.

But broader economic growth remains tepid.

The recovery seems to be on solid footing after stalling out over the winter, but it's not racing back to normal. Inflation has consistently fallen short of the Fed's 2 percent target, which some officials blame on the weak prospects for growth not only at home but across the world.

Retreating from its stimulus efforts now could amount to a tacit admission that the Fed had reached its ability to spur faster growth.

In an op-ed in the Washington Post, Harvard University professor Lawrence H. Summers argued raising the target rate soon would be a 'serious error.”

'At this moment of considerable fragility, the risk is that a rate increase will tip some part of the financial system into crisis with unpredictable and dangerous consequences,” he wrote.

The growing chorus of those who think the Fed will - or, at least, should - wait to hike rates also argue that falling oil prices, weakness in China and the stronger U.S. dollar are keeping a tight lid on inflation.

Speaking Monday in California, Atlanta Fed President Dennis Lockhart - an influential voice at the central bank - updated his own assessment. He said China's move to devalue its currency and falling oil prices are 'complicating” the outlook.

But he also highlighted how far the national economy has come since the recession.

He reiterated his stance that there has to be a 'high bar” for not raising the interest rate.

'I expect the normalization of monetary policy that is, interest rates, to begin sometime this year,” he said.

But this time, he didn't specify just when.

Reuters contributed to this report.