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Global market turmoil makes planned interest rate rise 'less compelling' US stock markets surge to end six days of sell-offs
(about 3 hours later)
The global turmoil in stock markets has made a September interest rates rise “less compelling”, an influential policymaker at the Federal Reserve said on Wednesday. US stock markets surged on Wednesday afternoon, ending a six-day sell-off sparked by growing global concerns about the health of the Chinese economy.
Bill Dudley, the president of the New York Federal Reserve and a key member of the US central bank’s rate setting committee, said: “The decision to begin the normalization process at the September FOMC [Federal Open Market Committee] meeting seems less compelling to me than it was a few weeks ago.” The Dow Jones Industrial Average soared 619 points (3.95%) to close at 16,285, as concerns about China gave way to bargain hunters piling into the market as an an influential Federal Reserve policymaker said it was unlikely that interest rates will rise in September, as had been widely expected.
Dudley’s comments, at a press conference in New York, came as US stock markets lost most the gains they made in morning trading. The Dow Jones Industrial Average was up 212 points (1.35%) at 12pm, falling back from opening up over 400 points. The S&P 500 was up 22.5 points (1.19%), from opening up 46.5 points. The Nasdaq was up 58.1 points (1.26%), down from a 135-point rise. The Dow has now recovered most of the losses it sustained on Monday and Tuesday. The S&P 500 and the Nasdaq also closed higher on Wednesday, following days of losses.
European stocks also fell at the close on the other side of the Atlantic. The FTSE 100 index of blue-chip shares closed down 102 points to 5,979. It has now fallen for 11 of the last 12 days (on Tuesday it jumped by 188 points), and is currently 15% off its record high. Traders were emboldened by Bill Dudley, the president of the New York Federal Reserve and a key member of the US central bank’s rate setting committee, saying that a September interest rate rise was now “less compelling” than it had been just a few weeks ago.
Dudley also sought to reassure investors that recent global stock market rout did not reflect a problem with the US economy.
“The decision to begin the normalization process at the September FOMC [Federal Open Market Committee] meeting seems less compelling to me than it was a few weeks ago,” he said at a press conference on Wednesday. “The stock market has to move a lot – and stay there – to have implications for the US economy. What we’re seeing is not a US problem. This is very different from the financial crisis.”
The indication that a rate rise would be delayed helped to calm investors unnerved by the prospect of an imminent tightening in credit costs in the world’s largest economy. The prospect of a rate increase by the Fed has also alarmed global stock markets, because it could draw investment funds our of emerging markets and back to the US.
While US stocks rallied, European markets suffered further falls. The FTSE 100 index of blue-chip shares closed down 102 points to 5,979. It has now fallen for 11 of the last 12 days (on Tuesday it jumped by 188 points), and is currently 15% off its record high.
Germany’s DAX and Spain’s IBEX both lost 1.3%, and the French CAC dropped 1.4%.Germany’s DAX and Spain’s IBEX both lost 1.3%, and the French CAC dropped 1.4%.
In China a rally on the Shanghai Composite index collapsed and the market closed down another 1.3%, to its lowest level since December. Over the past three days the index has lost close to a quarter of its value.In China a rally on the Shanghai Composite index collapsed and the market closed down another 1.3%, to its lowest level since December. Over the past three days the index has lost close to a quarter of its value.
Dudley, a dovish policymaker and close ally of Fed chairwoman Janet Yellen, did leave the door open to raising rates for the first time in nearly a decade when the US central bank holds a policy meeting 16-17 September. He said a rate hike “could become more compelling by the time of the meeting as we get additional information on how the US economy is performing and … international financial market developments, all of which are important to shaping the US economic outlook”.
It comes after Lawrence Summers, a former US treasury secretary, warned that raising rates soon would be a “serious error” and raised the prospect of restarting quantitative easing.
“A reasonable assessment of current conditions suggests that raising rates in the near future would be a serious error that would threaten all three of the Fed’s major objectives: price stability, full employment and financial stability,” Summers said in an opinion piece for the Wall Street Journal.
He also posted on Twitter to warn that “we could be in the early stage of a very serious situation”.
Economists at Barclays have also pushed back their forecast for a rate rise from next month to March.