Ailing global economy could lead Fed to delay increase

Associated Press

WASHINGTON

Just as the U.S. job market has finally strengthened, the Federal Reserve now confronts a new worry: a sputtering global economy that’s spooked investors across the world.

The economic slump could spill into the United States, potentially weakening job growth and keeping inflation well below the Fed’s target rate. Such fear has led some analysts to suggest that the Fed might wait until deep into next year to start raising interest rates — and then raise them more gradually than expected.

“I’m beginning to think that the Fed might delay [a rate increase],” said Bob Baur, chief economist at Principal Global Advisors, an asset management firm. “If we don’t see a better situation in Europe and better things out of Japan and stability in China, they might hang on just a little bit longer.”

Yet so far, the prospect of continued lower rates — which make loans cheaper and can fuel stock gains — is being outweighed by investors’ mounting fears of weakness from Asia to Europe to Latin America. After shedding 223 points Monday, the Dow Jones industrial average is now more than 5 percent below its September peak. Americans with stocks in their retirement accounts have taken a beating — at least for now.

On Tuesday, solid earnings from several large U.S. banks gave stocks an initial boost before share prices faded by the close. The Dow lost about 6 points.

Since the Great Recession ended five years ago, Fed officials have often stressed that their policies were devised to nurture the U.S. economy and job market alone. But Fed officials are now assuring international financial leaders that they will closely monitor the effects of the Fed’s policies on overseas economies. And the Fed’s vice chair has publicly acknowledged that the turmoil abroad could lead the Fed to act more cautiously.

“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to [raise rates] more slowly than otherwise,” Vice Chairman Stanley Fischer said in a speech last weekend.