Recent Stock Market Losses Cause Many to Doubt that the Fed Will Raise Rates

The performance of the stock market Monday morning brought about some anxiety among big U.S. businesses and other stakeholders while the Dow Jones dropped by 1,000 points and spent the rest of the day fighting its way back toward the break-even point.

The morning started with an 8.5 percent drop in China's Shanghai Composite Index, which erased all the gains made by the world's second-largest economy so far in 2015. At 9:30 a.m., the Dow Jones began its 1,000-point drop from 16,459 points down to 15,454, which was completed in just 10 minutes. It closed Monday down 588 points, a decline of about 3.57 percent.

"The interesting near-term impact is on the Fed’s September decision to raise rates or not.  Market sentiment was split roughly even before this event. Today it’s tilting toward no action in September."

For many, the Dow Jones' steep decline on Monday removed any doubt as to whether the Federal Reserve will raise interest rates, which have been at or near zero for seven years. Prior to Monday, many pundits predicted that the country's economy had experienced the growth needed for the Fed to raise the rates; now, they're not so sure.

"The real effect—if any—from the stock market volatility of the last few days won’t occur for a while," said Sean Becketti, Chief Economist at Freddie Mac. "It will take time for investors to analyze the depth of the economic weakness in China, the effectiveness of the Chinese government’s responses, and the ultimate impact on various sectors of the U.S. economy.  The interesting near-term impact is on the Fed’s September decision to raise rates or not.  Market sentiment was split roughly even before this event. Today it’s tilting toward no action in September."

Former Director of the National Economic Council and former Secretary of the U.S. Department of Treasury Lawrence H. Summers expressed similar sentiments through Twitter. Summers tweeted on Monday based on what happened with the stock market that he believes this is "no time for an interest rate hike" and that "raising rates threaten Fed's major objectives—price stability, full employment, financial stability."

Summers also hinted that Monday's activity may be a sign of tumult ahead, since both the Dow Jones and Nasdaq are considered to be in "correction" mode for the first time since in four years after experiencing steep declines on Friday, August 21 (Dow Jones fell 531 points and Nasdaq dropped by 6.8 percent).

"As in August 1997, 1998, 2007 and 2008 we could be in the early stage of a very serious situation," Summers tweeted.

One economist was not surprised by Monday's turbulent stock market activity, however.

"I think we've been expecting a correction in the markets for some time now so it's not totally surprising," Trulia Chief Economist Selma Hepp said. "We may expect some of the liquidity seeking refuge in the U.S. commercial real estate and mortgage securities, much less in the residential real estate. On the other hand, however, we will continue to see low mortgage rates as a result of more money going into treasuries."

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