What's going on?

Two important surveys on �services� (e.g. a financial or healthcare company) in the US came out in recent days � and neither painted an encouraging picture for the economy.

What does this mean?

On Tuesday, important data suggested services activity in August fell to its lowest level in 6.5 years – much worse than economists were expecting. This is consistent with a similar survey that was released over the weekend, which, when combined with a recent survey on manufacturing activity, suggested that the overall economy was growing at a rate of only 1%. After a lacklustre first half of the year, economists were optimistic that the economy would bounce back in the third quarter – but this data suggests otherwise.

Why should I care?

For the markets: These new data points make it less likely that the Federal Reserve (�the Fed�) will raise interest rates at its next meeting.
Raising interest rates is typically an action that makes it harder for the economy to grow, because it becomes more expensive for people and businesses to borrow, and in turn spend, money. In recent weeks, senior Fed officials hinted that an interest rate increase at its meeting on September 21st was a distinct possibility. However, this recent data coupled with Friday�s weaker-than-expected employment report might give the Fed officials enough of a reason to hold off from taking any action.


The bigger picture: The Fed risks developing a credibility problem – like The Boy Who Cried Wolf.
The Fed has faced criticism this year for talking up the likelihood of higher interest rates but not actually raising them. That matters because the Fed has historically used its communications with investors to influence their behavior. When its credibility is intact, the Fed�s communications give it a measure of control over the markets, which is helpful when it�s trying to enact specific policies (for example, stabilizing the economy in the wake of the 2008 financial crisis). If investors begin to seriously question what the Fed says, the Fed risks an important part of its toolkit becoming much less effective.