Sept. 17--Investors are betting on the Federal Reserve to get cold feet again Thursday.
Or so says the futures market, where investors have put only a 23 percent probability on the Fed going ahead with its first interest rate increase in nine years.
Just a few weeks ago, the view was very different.
Back then, economists and investors seemed to think a rate increase would be a sure thing at the Fed's September meeting of the federal open market committee. The U.S. economy was looking relatively strong, seemingly able to absorb the stress the higher borrowing costs a rate increase sets off. Consumer confidence was soaring, car sales were brisk, home sales were improving and unemployment hit the lowest level in seven years at August's 5.1 percent.
But now, the Fed's green light for an interest rate increase has turned amber as recessions overseas threaten every corner of the globe's economy, including in the U.S.
Citigroup chief economist Willem Buiter wrote in detail last week that a likely global recession in 2016 should last through 2017, hurting the U.S. economy.
Buiter thinks the U.S. will avoid following the world into recession. But with China to Russia to Brazil a mess already and the drag spreading through emerging markets, growth in the U.S. has to slow down too.
It's a disheartening outlook for the U.S. and the world, which never fully recovered from the financial crisis despite central banks propping up economies on almost every continent. The Fed has kept rates near zero to help U.S. consumers and businesses get out of debt and start spending more than they would had borrowing costs been higher.
Both the International Monetary Fund and World Bank have said the world is too vulnerable now to deal with the pressure of a Fed rate increase. Former U.S. Treasury Secretary Larry Summers has urged the Federal Reserve to wait, arguing that given the fragile state of the economy, raising rates now would be a "dangerous mistake."
While investors seem to think the Fed will wait, a Bloomberg survey shows economists split roughly down the middle about the Fed's move Thursday. Many think its time for the Fed to finally raise rates.
"The markets are ready for the Fed and our strategists expect a very small market reaction," said Bank of America Merrill Lynch economist Ethan Harris in a note to clients Wednesday. "Chair Janet Yellen should put in her earplugs and do what seems right for achieving the Fed's dual mandate."
Under those mandates, the Federal Reserve works to keep unemployment low and generate modest inflation so the economy is stable.
While the U.S. economy looks OK, global threats are the preoccupation of the day. Large U.S. companies do about half of their business overseas while competing with global businesses selling into the U.S. Global weakness matters. If U.S. companies have trouble competing with global competitors here and abroad, U.S. businesses may have to cut costs and lay people off, causing unemployment to rise.
Harris argues that even if the Fed increases rates a little now, it will have "enough flexibility" to adjust if economic data later sours. "The U.S. economy has become more resilient and can handle a gentle tightening cycle," he said.
But Buiter doesn't think economists appreciate the recession threat looming over the global economy now.
"Economists seldom predict cyclical downturns or recoveries," he said. "As a profession, we are notoriously bad at calling turning points.
"Evidence of a global slowdown is everywhere," he added, noting that the "modest pickup" in growth in the U.S. and other developing markets "is swamped by a sharp decline in emerging market growth."
He thinks there is a 55 percent chance of a "moderate" global recession sparked by a recession or severe slowdown in China spreading to other emerging markets next year. China has already slowed far more than official numbers suggest, perhaps growing at 4 percent or less, he said. He doubts that China will do enough fast enough to stop a recession.
"The advanced economies will be impacted, of course," he said.
With such a threat, and investors continually wondering about the Fed's next move, uncertainty is likely to continue to play with investors' nerves.
gmarksjarvis@tribpub.com
