Wall Street: September rate hike no sure thing

NEW YORK -- A September rate hike from the Federal Reserve could still happen, but is far from a sure thing.

That was the general consensus of Wall Street pros following the release Wednesday of the minutes from the Fed's July meeting, in which the nation's central bank was non-committal on a firm timetable for its first interest rate hike in almost a decade. In a key portion of the text of the closely read minutes, the Fed said that "conditions for policy firming had not yet been achieved." But the Janet Yellen-led Fed included a caveat, adding that "conditions were approaching that point."

"Investors were focused on the minutes to see if there was any clear signal that they would be moving in September, but I don't think we got that," says Don Ellenberger, head of multi-sector strategies at Federated Investors.

Stocks traded erratically after the release of the minutes. The Dow Jones industrial average, which was down nearly 230 points earlier in the session, briefly climbed back into the black following the minutes, but then turned down again. The Dow, which was hurt by a nearly 5% drop in oil to a new 6 1/2-year low, closed down 163 points, or 0.9%, to 17,349.

The Fed reiterated that it would still like to see more evidence that the economy and job market were "sufficiently strong" for them to feel "reasonably confident" that inflation would get back to 2%, a level it views as more healthy.

But given fresh information since the Fed's July 28-29 meeting that could keep a lid on inflation -- ranging from sinking commodity prices to a strengthening dollar, as well as questions surrounding the health of China's economy after Beijing unexpectedly devalued its currency last week -- there's a good chance the Fed could hold off on rates until later in the year, says Ellenberger.

"If they were not ready to hike back in July it's now less likely they will hike in September" given the fresh headwinds, he argues.

Not long after the release of the Fed minutes, futures markets were predicting only a 38% chance of a September rate hike, Ellenberger noted, down from 48%.

So it's back to data-watching for Wall Street, which will keep a close eye on the upcoming August jobs report and incoming data on inflation.

"Now, we'll have to hold our collective breath as we wait for the release of August payroll data and determine if that's enough for the Fed to move," says Quincy Krosby, market strategist at Prudential Financial.

The fact that the Fed expressed fresh worries about inflation possibly taking longer to perk up, and acknowledged that there were fresh "downside risks" arising from "developments abroad" in places like China, suggests that a September rate hike might "not be a go" after all, says Anthony Valeri, an investment strategist at LPL Financial.

"Investors can breath a sigh of relief that the Fed is aware of overseas challenges and declining inflation and more work needs to be done for the economy to withstand a rate hike," Valeri says.

Valeri argues that now is not the best time for the Fed to hike rates, given the rout in commodity prices and the recent turbulence in China. Holding off until later in the year would "buy some time" for the Fed to see if the second-quarter rebound in the U.S. has legs and whether developments in China and plunging oil prices are going to have a "material impact on the U.S. economy" and the outlook for inflation, he says.