Investors Think China Tumult Will Cause Fed to Delay Liftoff -- Goldman

        By Kristen Scholer
        China's rout is making investors increasingly cautious, causing some to push back expectations of liftoff.
        "Our recent client meetings reveal that many investors believe economic uncertainty in China will cause the Fed to delay tightening until 2016," wrote David Kostin, chief U.S. equity strategist at Goldman Sachs Group Inc., in a note to clients Friday, just days before the Chinese stock market tanked 8.5% Monday.
        A 2016 liftoff does not reflect the view of Goldman economists, who believe the first rate rise in nearly a decade will come in December. Still, Mr. Kostin doesn't deny that China, along with other factors, is having an adverse impact.
        "A 20% collapse in Brent oil price during the past 10 weeks and heightened concerns regarding China growth prospects (including a 30% plunge in less than one month in the China A share index) have outweighed the boost from US economic acceleration," he said.
        While investors have benefited from low rates and may like them to stay around for longer, a postponement in liftoff due to unexpected challenges in the global economy isn't exactly a good thing.
        The Fed begins a two-day meeting Tuesday before releasing a policy statement Wednesday in which it could provide more clarity on when it anticipates to raise interest rates.
        Fed Chair Janet Yellen has said she believes liftoff will happen this year. But with situations abroad -- from China to Greece -- worsening in the last month, speculation that the Fed may hold off on liftoff has picked up. The central bank said in its June statement that "international developments" could be reasons for a delay.
        The majority of private economists surveyed by the Wall Street Journal in mid-July said they expect the Fed to raise rates in September, though a growing number said the central bank may wait until December. Market participants largely expect the first rate increase in December.
        Amid China's stock market tumult Monday, Citigroup Inc. sent a note to clients saying that a "hard landing in China or a disorderly deterioration of the situation in Europe becoming systemic" pose the biggest downside risks to its interest rate outlook.
        Even so, the bank maintained its forecast that policy makers will raise rates in September and said that China's growth prospects are stabilizing and that the country's wild stock market gyrations will have a relatively muted impact on China's economy.
        As turbulence builds overseas, the Fed needs to see more hurdles cleared before it raises rates.
        (END) Dow Jones Newswires

        July 27, 2015 13:35 ET (17:35 GMT)

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