US stock prices fell to their lowest level in two weeks after New York Federal Reserve President William Dudley said a September rate hike may be on the table.
Dudley, a voting member of the central bank’s policy making arm, says the labor market has tightened and wages are rising. “I think we’re getting closer to the point in time when it will be appropriate to actually raise short-term rates again,” said Dudley on Tuesday.
Dudley’s comments sent all three major indexes into the red. Financial traders now see an 18 percent chance of a rate hike in September, up from 9 percent before Dudley’s comments. Odds for a December rate hike were also up sharply.
Given solid hiring numbers in the past two months, stronger consumer spending and rising wages, analysts say a rate hike in either September or December is extremely likely.
Bankrate.com chief financial analyst Greg McBride says waiting too long before raising rates could leave the Fed with “insufficient tools to combat the next economic slowdown,” when it comes. But Gus Faucher at PNC Financial Services says weak GDP growth, only about one percent in the first half of the year, might cause the Fed to hold off until December. Most experts say a November rate hike is probably off the table, given its proximity to the presidential election.
The Fed last raised its benchmark rates, the rate it charges other banks on overnight loans, in December. Fed watchers had been expecting at least two rate hikes in 2016, but slowing growth overseas and market shocks, including the recent Brexit vote in Britain have made U.S. central bank officials more cautious.
Lower borrowing costs help stimulate investments and spending. But left unchecked low rates can also lead to high inflation, which are currently below the Fed’s target rate of two percent.