Tags: federal reserve | china | rate hike | yuan devaluation

Fed Weighing Liftoff May See China Yuan Devaluation as Minor Headwind

Image: Fed Weighing Liftoff May See China Yuan Devaluation as Minor Headwind
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Tuesday, 11 Aug 2015 01:08 PM

Federal Reserve officials won’t delay raising interest rates because of the surprise devaluation of China’s currency, economists said, even though the move could prove a headwind for U.S. growth if it drives up the dollar.

“I wouldn’t see this as a big game-changer on the medium-term outlook” for the U.S. economy, said Roger Aliaga-Diaz, a senior economist at Vanguard Group Inc. in Valley Forge, Pennsylvania, noting the People’s Bank of China had described it as a one-time realignment.

The PBOC earlier on Tuesday cut its reference rate for the yuan to the dollar by 1.9 percent to support exporters and boost the role of market pricing in Asia’s largest economy.

The move dragged Asian currencies lower and pulled down stocks of U.S. and European firms that sell goods into those markets. The Bloomberg Dollar Spot Index, which tracks the greenback’s performance against 10 major rivals, was 0.6 percent higher at 12:28 p.m. in New York.

The Fed is weighing its first rate increase in more than nine years and has said it will take international developments into account in deciding when to tighten. It has repeatedly noted that a stronger dollar, which makes U.S. goods more expensive overseas, can harm growth by slowing exports.

The devaluation “will likely be seen by Fed officials as a minor headwind to growth, but is not significant enough to change our base view of September liftoff,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, wrote in a research note.

September Liftoff

Fed officials next meet Sept. 16-17 in Washington. Investors today saw a 46 percent chance they will raise rates at that gathering, based on pricing of federal funds futures contracts, down from 54 percent on Friday. The odds assume the effective rate will rise to 0.375 percent after liftoff.

The U.S. currency, which is up about 19 percent over the past 12 months on the Bloomberg Dollar Spot Index, has also muted import prices, helping to hold down inflation that has lingered below the Fed’s 2 percent target for more than three years.

Gennadiy Goldberg, U.S. strategist at TD Securities LLC in New York, said an additional strengthening could affect how far the Fed eventually raises rates, but not the timing of an initial hike.

“The only way this would have a bearing on the Fed’s thinking for September is if it sparks a very significant amount of volatility in the markets,” he said.

The devaluation could also have a positive impact, according to Roberto Perli, a partner at Cornerstone Macro LLC in Washington and a former senior Fed economist.

“The move makes a Chinese hard landing less likely at the margin, which is good for the U.S. economy, U.S. markets and the Fed,” Perli wrote Tuesday in a note to clients. “This should at least partly offset the stronger dollar and leave the odds of a liftoff later this year (probably in September) little changed for now.”


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Federal Reserve officials won't delay raising interest rates because of the surprise devaluation of China's currency, economists said, even though the move could prove a headwind for U.S. growth if it drives up the dollar.
federal reserve, china, rate hike, yuan devaluation
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2015-08-11
Tuesday, 11 Aug 2015 01:08 PM
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