China throws the Fed a curve ball

Nancy Marshall-Genzer Aug 19, 2015
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China throws the Fed a curve ball

Nancy Marshall-Genzer Aug 19, 2015
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The Federal Reserve on Wednesday will release minutes from its July meeting, and investors will scour them for signs pointing to an interest rate hike this year.

One thing they won’t find in the minutes? Any mention of the devaluation of the Chinese yuan. That happened after the Fed meeting, but it could influence the timing of a rate increase. 

Before China’s devaluation last week, Wall Street was betting on a Fed interest rate hike at next month’s meeting. Now investors aren’t sure what the Fed will decide.

“The decision already was on a knife edge and could really, already have just depended on the votes of a couple of policymakers,” says Craig Erlam, a senior market analyst at Oanda.

Erlam expects those Fed policymakers to shy away from an interest rate increase next month if China devalues the yuan again. 

Why does the Chinese currency have the Fed all tied up in knots? Because when it’s devalued, the U.S. dollar gets stronger, making American exports more expensive. Nour Eldeen Al-Hammourychief market strategist at ADS Securities, says China was sending the Fed a message.

“Try not to raise rates at this time,” he says. “Because if you do so, we might need to devalue our currency even more than that.”

That would make imports from China even cheaper, tamping down prices in the U.S. just as the Fed is trying to nudge inflation up.

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