Why the Fed may still hike in September: Economist

Why the Fed may still hike in September: Economist

As the Fed headed into its two-day meeting, former Richmond Fed President Al Broaddus said Tuesday it's a "very close call" on whether policymakers will decide to increase interest rates for the first time in nine years in September or December.

"I think the expectation right now probably has to be December," he told CNBC's " Squawk Box "-though he personally would like to see a September hike. "I think they'd like to get on with it. And they should get on with it."

The motivation behind his urgency has nothing to do with worries about a "big bulge" in inflation around the corner, said Broaddus. "I'd just like to see us get it off the table. ... It's a distraction."

He also dismissed the notion that a rout in commodities prices and a meltdown in the Chinese stock market might be reasons to delay. He thinks the Fed views those factors as transitory.

The data-dependent Fed has two more monthly employment reports from the government before central bankers meet in September. "If those numbers are strong, I think that would lock it for September," he said. "If there are more mixed, it could be pushed back to December."

The exact timing of liftoff is not what's most important, according to Broaddus, who stressed "the slope [of hikes] and what happens over the medium term" in the next couple of years. "[The Fed] is going to have to react to many things that we don't know now."

But he added that he feels the Fed is well-equipped to normalize rates from their near-zero percent levels, which were imposed in response to the 2008 financial crisis to boost the economy.

Read More More of Wall St. sees a later rate hike: Survey

Deutsche Bank's Peter Hooper, an ex-Fed economist, said earlier on "Squawk Box" that he expects the Fed to raise rates in September. He also believes the stock market plunge in China and falling commodity prices unlikely to put off a hike.

The Federal Open Market Committee does not need to telegraph to investors its intentions when it releases a statement following its two-day meeting, Hooper said, citing the data dump between now and September.

The Fed needs to see evidence that economic growth is being driven by strength in consumer spending and inflation is at least bottoming out and not heading downward, he said. "These guys will know when the July employment report comes out, the August report comes out. There will be a shift. You'll have plenty of time to react to those numbers, and both 'Fedspeak' and market reaction will move."

The CME FedWatch Tool, which measures daily market reaction to the probability of a change in the fed funds rate, puts the chance of a rate hike at 17 percent in September and 53 percent in December.

While there's no question the commodity market weakness is a sign of slower growth in China, Hooper said, lower crude prices can potentially offset recent soft retail sales. Economists typically expect Americans to spend more in the broader economy when they pay less at the pump.

"Are consumers pulling up their tents again? The drop in oil prices is a little bit of a gift there," he said.

Hooper only sees the Chinese stock rout influencing the Fed only if the recent 30-percent plunge in the Shanghai composite (Shanghai Stock Exchange: .SSEC) spills over into global equity markets and the U.S. in particular, which he sees as unlikely.

Geoff Dennis, head of global emerging markets equity strategy at UBS, said the pullback is not due to worries over the Chinese economy. Instead he said it's an inevitable outcome because the country's markets grew too frothy and rich.

Chinese stocks remained volatile Tuesday, following an initial stampede out of the market. Despite a fresh commitment by Beijing to try to put a floor under the selling, investor sentiment remained shaky.

The Shanghai composite had surged 147 percent in the 12 months leading up to hitting seven-year highs in mid-June.

But since then, the market has fallen nearly 30 percent based on Tuesday's close. In recent weeks, the Chinese market had been staging a bit of a recovery, after Beijing stepped in with rescue measures.

Read More Why this China stock market plunge could be different

Chinese stocks are not yet particularly cheap, but they may have reached fair value, Dennis told "Squawk Box." In the worst case scenario, UBS sees the Shanghai composite falling another 1,100 points, or 30 percent, he said.

Still, investors are right to be nervous about the Chinese economy, he said. UBS forecasts China's economy to grow 6.8 percent this year, though Dennis said that projection may be on the high side.

Commodity prices are not only reflecting concern about growth prospects in China, but in emerging markets around the world, he said.

"I think one reason why markets have come down, and why emerging markets in particular have come down, is people are saying how strong is the global economy, what are commodity prices telling us, and still the Fed is going to raise rates," Dennis added.




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