U.S. GDP Data Further Complicates Fed Rate Hike Predictions

For the past year, traders have been trying to get inside the minds of the U.S. central bankers at the Federal Reserve to determine when the bank's much anticipated rate hike will come.

The timing of a rate increase has always been ambiguous, but in light of recent market events, predicting when the bank will feel comfortable tightening has become a minefield.

China Headwinds

This week, headwinds from China pushed global markets significantly lower as investors worried about whether the nation's slowdown would tip recoveries in the United States and Europe off track. After the People's Bank of China moved to devalue the yuan, many began to worry about the health of the U.S. economy with the dollar on the rise.

American multinationals are likely to become less competitive on the global stage as Chinese-made products will become cheaper.

Related Link: If China Devalues Again, Asset Prices Could Crash (For Real This Time)

U.S. Economy Resilient

However, the Fed has made it clear that exchange rate control is not a policy aim and that the decision to raise rates will be data dependent. If that is the case, the nation's most recent GDP figures support a rate hike sooner than later.

On Thursday, U.S. second-quarter GDP was revised upward to 3.7 percent. That marks a significant increase from initial estimates of 2.3 percent and would support the case for a rate hike in the near future.

A Question Of Timing

Before China became a major concern, most were expecting the bank to raise rates at its next policy meeting in September. However, since "Black Monday," those expectations have been pushed back. On Wednesday, Fed official William Dudley remarked that the case for a September hike was "less compelling."

While the labor market has been on track for improvement and the U.S. economy has appeared resilient despite international uncertainty, many worry that inflation is under pressure from the situation in China, something that will likely keep the Fed from moving forward with a rate hike.