China Complicates Matters For The Fed

The recent selloff in markets around the world has underscored just how fragile the global economy can be. Concerns about China are giving investors reason to worry about stability and presenting a challenge for policymakers, especially in the United States where the Federal Reserve has been preparing to tighten its policies.

Now, with share markets markedly lower and commodity prices at new lows, many wonder how the U.S. central bank will cope.

Rate Hike

The Fed has been working to ready U.S. share markets for a rate increase for the better part of a year in hopes that tightening won't have a major impact on traders.

However, Monday's selloff is likely to throw a wrench in those plans as widespread panic has led to a major selloff that took the Dow Industrial Average to an 18-month low.

Related Link: Brian White: China, Market Malaise Is Creating "Irrational" Valuation For Apple

U.S. Economy Resilient

So far, the U.S. economy has proven resilient despite financial problems in Europe and a slowdown in China.

Economic indicators have suggested that U.S. hiring is improving steadily and that the economy is making its way onto steady ground. The eurozone's issues with Greece were largely shrugged off by Fed policymakers, as the uncertainty appeared to have little impact on the United States' financials.

Risks

However, the most recent problems in China may not be so contained. The People's Bank of China's decision to devalue the yuan has pushed the U.S. dollar sharply higher, something that U.S. firms say will hurt their bottom lines.

A strong dollar means that multinational companies will find it harder to sell U.S. goods abroad, as foreign competitors' products will be cheaper.

While those issues have been addressed by the Fed in the past, the question of how China will impact U.S. inflation remains unanswered. Many worry that the bank will not be able to meet its goal of 2 percent inflation amid the current circumstances, which will likely keep the bank from raising rates anytime soon.