Case Grows Stronger for December Liftoff Amid Yuan Devaluation, Goldman Sachs Says

China's surprise move Tuesday to devalue the Yuan reinforces the view of Goldman Sachs economists Zach Pandl and Chis Mischaikow that the U.S. Federal Reserve will not raise rates in September. As such, a December liftoff remains their call.

"All else equal, the unexpected appreciation of the yuan implies downside risks to inflation and an additional tightening of financial conditions that may affect growth - beyond the effects from the sizable appreciation in the dollar before this week," Pandl and Mischaikow said. "There could be some potential offsets, such as a healthier Chinese growth outlook and/or lower US interest rates. But on balance, the PBOC action marginally lowers the odds of a Fed liftoff in September, in our view, and December liftoff remains our call."

The economists note the FOMC's statement already indicates that the committee will take into account "readings on financial and international developments," so they don't believe additional language from the Fed will be needed. They said Chairman Janet Yellen's press conference would be a more natural venue for discussing the dollar's impact on financial conditions following the September 16-17 meeting.

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