Allstate Journal

China stock swoon is wildcard as Fed meets on rates

As the first Federal Reserve interest rate hike in nearly a decade nears, so does the importance of every Fed meeting, policy statement and pronouncement. The Fed kicks off its two-day July meeting today, and Wall Street will parse the Fed’s post-meeting statement to see whether the language jibes with a coming rate hike, perhaps as early as September, as Fed chair Janet Yellen hinted earlier this month in her testimony before Congress.janet-yellen-hearing2

Interest rate deliberations come at a time when financial markets are again experiencing turbulence from abroad. While the Greece debt crisis has faded from the front pages after an 11th-hour bailout deal, investors are confronted with a new, more present danger in China, whose stock market is in free-fall, conjuring comparisons to the U.S. dot-com stock crash that began in spring 2000.

Wall Street, no doubt, will be looking for clues from the Fed as to whether the Chinese market storm is enough to give them pause and hold off on rate hikes until they can get a better handle on whether the latest global headwind out of China will weigh on U.S. growth. China is the world’s second-biggest economy, so what happens in China impacts other economies around the globe. China’s Shanghai composite index plunged 8.5% Monday and another 1.7% today, and is down about 30% from its recent June peak and deep in bear-market territory.

In her comments to Congress two weeks ago, Yellen insisted that the conditions in the U.S. — namely a strengthening labor market and rebounding economy — suggest that the appropriate time for a rate hike is nearing. And Michael Gapen at Barclays believes the day for a hike is just months away. “We maintain our call for a September rate hike,” Gapen wrote in a report. “Improvements in the U.S. economy over the past several years leave the economy in a position in which rate hikes are not only possible but are also likely desirable.” While Wall Street knows a hike is coming, investors might get spooked if Yellen hints at a rate hike in the very near future.