For Fed to Delay Rate Hikes, Global Tumult Would Need to Infect U.S.

By Jon Hilsenrath 

        A wave of financial turbulence overseas could delay the Federal Reserve's plans to raise short-term interest rates in the months ahead, but only if it ends up knocking the U.S. economy off track.
        Fed officials signaled after their mid-June policy meeting they expect to raise rates in 2015 after keeping them near zero for almost seven years. Several officials have said since their gathering that September could be the time for liftoff.
        However, they could wait longer to move if the dollar surges and slows U.S. economic growth, heightened uncertainty saps households and businesses, or broader financial-market instability follows the recent turmoil in Greece, China and Puerto Rico.
        "Global growth is really important. We are all connected through the financial markets, through foreign-exchange markets," Fed governor Jerome Powell said last week in an interview with The Wall Street Journal. "If global growth weakens, or remains weak, and we get into a trend of that, then yes, that will be a big headwind for the United States economy."
        The latest turn in the Greek crisis occurs amid other financial troubles overseas. Stocks in China have tumbled, provoking interest-rate cuts by the central bank Saturday and reductions in bank reserve requirements to stem the drop. Meantime, officials in Puerto Rico are seeking concessions from creditors to stave off a cash crisis.
        In the days immediately after any financial shock, Fed officials monitor markets and banks for signs of deepening financial stress. Initial market reactions Monday were sharp but didn't appear disorderly. The Dow Jones Industrial Average fell 1.95%, a modest move compared with the 4.4% drop it registered the day after Lehman Brothers collapsed in September 2008. The dollar was little changed against the euro and yields on 10-year U.S. Treasury notes rose after an initial decline, a signal investors weren't flocking to safe-haven assets.
        Donald Kohn, a former Fed vice chairman who worked closely with then-chairman Ben Bernanke during the 2008 financial crisis, said Monday that it's hard to know how the Fed will respond to the Greek crisis so soon after talks broke down between the Athens government and its creditors. A national referendum next week could set Greece toward resolving a standoff with creditors--or it could send it toward departure from the eurozone.
        Because the Fed isn't likely to start raising interest rates until September at the earliest, officials have "time to figure this out," Mr. Kohn said in an interview. Right now, he said, the Fed is likely monitoring developments. "It is just a question of keeping on top of the situation," he said.
        Federal Reserve Chairwoman Janet Yellen and New York Fed President William Dudley were both in Basel, Switzerland, this past weekend for the annual meeting of the Bank for International Settlements and have been in close contact with counterparts at the European Central Bank about developments.
        Fed officials have said they will start lifting their benchmark short-term interest rate from near zero after they see more improvement in the U.S. job market and become more confident U.S. inflation is rising toward their 2% target after running below it for more than three years.
        Developments overseas could thwart those goals in several ways. A stronger dollar--driven by investors moving into safe-haven U.S. assets--could push down the price of imported goods and inflation while hurting exports, growth and hiring. Stock-market volatility could crimp business investment and consumer spending. Slower global growth could slow the U.S. expansion.
        The Fed's projections released June 17 showed officials split over their rate expectations for 2015: Five expected one rate increase, five forecast two increases, five saw three moves and two didn't want to lift rates at all this year. The center of the Fed's policy-making committee was particularly split between one and two moves.
        In futures markets, investors only modestly shifted their expectations on the outlook for U.S. interest rates toward a delay in Fed action. Yields on two-year Treasury notes dropped to 0.65% from 0.71% last week.
        Write to Jon Hilsenrath at jon.hilsenrath@wsj.com
        (END) Dow Jones Newswires

        June 29, 2015 17:50 ET (21:50 GMT)

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