A Key Fed Official Hints China Could Keep the U.S. From a Rate Hike

The Dow Jones Industrial Average traded up dramatically Wednesday, even as China’s benchmark index continued its dive, just at a slower pace of 1.3 percent. The Dow ended six straight days of losses, adding 619 points — the third biggest point gain ever — or nearly 4 percent. The financial roller coaster caps months of predictions — ranging from cautiously optimistic to nearly hysterical — over whether a six-year bull market is about to turn into a bear. But the biggest clue that could alter the direction of the economy will not come from New York or London, but from a resort in Jackson Hole, Wy.

There, leading Federal Reserve officials are set to begin meeting Thursday at the Federal Reserve’s annual Jackson Hole Economic Symposium, an economic summer camp for some of the most influential people in U.S. and global monetary policy. Fed chief Janet Yellen announced in May she won’t attend. But Fed Vice Chairman Stanley Fischer will, and investors will closely monitor his comments to see if China’s economic slowdown would keep the Fed from raising interest rates from near zero percent.

However, on Wednesday, William Dudley, president of the New York Federal Reserve, might have tipped the Fed’s hand. He’s a voting member of the Fed Open Market Committee and a close Yellen ally.

“From my perspective, at this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,” Dudley said at a Wednesday press conference. He said he wanted to raise interest rates this year — a sign that the Fed believes the American economy is getting stronger — but added: “Let’s see how the data unfold before we make any statements about exactly when that might occur.”

He then hinted China’s slowdown could impact the outcomes of the Fed’s September meeting.

“International developments and financial market developments do have relevance, because they can impinge and affect the economic outlook,” Dudley said.

Whether Fischer will echo these comments remains to be seen. If he does, the long-awaited rise to the cost of borrowing could be delayed again. The U.S. Central Bank has lent money for free since 2006, before the start of the Great Recession in 2008. The title of the conference — “Inflation Dynamics and Monetary Policy” — strongly implies that interest rates would, at the very least, be a topic of conversation. And if the past is any guide, the meeting in Wyoming could be an impactful one.

At the 2007 conference, held as the height of the U.S. housing bubble, then-Fed chairman Ben Bernanke laid the groundwork for a 0.5-percentage-point rate cut, something that made it cheaper for Americans to borrow to buy homes; the bubble burst a year later. Then, in 2010, he started movement toward quantitative easing, a technique that flooded the American economy with more money amid fears of a double-dip recession.

Yellen has moved away from making the annual gathering a forum to preview the September meeting; she’s spending the weekend with family, according to a Fed spokesperson. But that’s not going to stop policy makers and investors from waiting, with baited breath, for any hint from Fisher on what the Fed plans to do in September.

“We’re looking for smoke signals. The market is currently spooked,” Charles Calomiris, a professor of economics at Columbia University, said on Bloomberg TV Wednesday. Investors “don’t know what to expect.”

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