After China’s shocking currency devaluation, which some more conspiratorially-minded observers have concluded was China’s retaliation to the west for the IMF’s recent snub that pushed back China’s evaluation for inclusion into the SDR to some indefinite point in 2016, the only question on everyone’s mind is whether the Fed will delay or outright cancel any imminent “data-dependent” rate hikes as a result of the implicit tightening of monetary conditions thanks to China, and the dramatic appreciation of the USD which would not have taken place without China.
And while we await the first Fed speaker to hit the public circuit since Monday’s night’s dramatic event, which is Goldman’s NY Fed’s Bill Dudley speaking in a few minutes, here is what two of the most influential banks have to say on the topic.
First, here is Goldman:
We expect that Fed officials would evaluate the recent news in a similar way. All else equal, the unexpected appreciation of the yuan implies downside risks to inflation and an additional tightening of financial conditions that may affect growth–beyond the effects from the sizable appreciation in the dollar before this week. There could be some potential offsets, such as a healthier Chinese growth outlook and/or lower US interest rates. But on balance, the PBOC action marginally lowers the odds of Fed liftoff in September, in our view, and December liftoff remains our call. The FOMC’s post-meeting statement already indicates that the committee will take into account ‘readings on financial and international developments,’ so we do not think any additional language would be needed at this stage. Fed Chair Yellen’s press conference would be a more natural venue for discussing the dollar’s impact on financial conditions, if this remained a concern at the time of the September 16-17 meeting.
This post was published at Zero Hedge on 08/12/2015.
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