Gathering at the mountain getaway in recent Augusts, the stewards of global currency have contended with the looming collapse of Lehman Brothers in 2008, global deflation worries in 2010, serial Greek fiscal meltdowns and other dramas. This time, they confront a big disparity between the world’s two largest economies, the U.S. and China.

The U.S. has recovered enough from the last financial crisis that Fed officials have been preparing to raise interest rates to prevent overheating down the road. But China appears to have lost economic momentum, driving the People’s Bank of China to cut rates and take other measures to boost growth. Markets have responded to these conflicting forces with turbulence, creating new uncertainties for policy makers about the economic outlook.

Before this week’s turmoil, Fed officials had signaled they might move as soon as next month to start lifting their benchmark interest rate from near zero, where it has been since December 2008. It was shaping up to be a tough decision even before the stock-market corrections around the globe. Now, the odds of a rate increase in September appear to have diminished, though a move is still possible if markets stabilize and new economic data show the U.S. economy is strengthening despite threats abroad.

New reports on Tuesday showed increases in U.S. consumer confidence and new home sales in August and July, respectively, reasons for Fed officials not to become too glum about the U.S. outlook.

“Prior to these market events in the last few days, I thought that this was about as close to a 50/50 call as you can get,” said former Fed Vice Chairman Alan Blinder of the odds that the central bank would raise U.S. rates in September. If markets don’t stabilize, he said, the Fed would likely hold off on a rate increase.

“If the markets are in anything close to the sort of tizzy they have been in the last few days, then the Fed will not throw a match into the fire” when it meets September 16-17, said Mr. Blinder, a Princeton University professor and friend of Fed Chairwoman Janet Yellen.

Ms. Yellen will not be attending this year’s Jackson Hole conference, but Vice Chairman Stanley Fischer is scheduled to deliver remarks there Saturday on inflation. European Central Bank President Mario Draghi won’t be there, but the ECB and many of the world’s other central banks will be represented by senior officials. The meeting has included top central bankers from Turkey, Malta, Sweden, South Korea and beyond in the past.

It is a fraught moment for all of the world’s central banks. China’s repeated efforts to stimulate growth don’t seem to be working. China’s central bank cut interest rates by a quarter percentage point on Tuesday and its stock market fell.

Many other economies are trapped in the middle of a global monetary tug of war between the two economic giants, especially emerging markets and commodity-producing countries. Their economies have been hit by China’s slowdown. At the same time, their currencies have been declining against the dollar as the Fed prepares for higher rates. If central banks in places such as Brazil, South Africa or Russia try to stimulate their economies by cutting interest rates, they risk capital flight and potentially destabilizing currency depreciation. If they don’t, they risk deep recessions.

One potential fault line that Fed officials are watching carefully: Heavy loads of U.S. dollar debt accumulated by local companies in emerging markets. Total corporate bonds outstanding in emerging markets have almost doubled since 2008 to $6.8 trillion, according to Institute of International Finance estimates. The share of this debt issued in U.S. dollars rose from less than 15% in 2008 to more than 40% in the first five months of 2015.

Those debts become harder to pay off as the dollar appreciates. It is up more than 7% against a broad basket of other currencies so far this year.

The central banks also face skepticism about the paths they are charting. “Our global economy is fixated on central banks and the latest utterance of the monetary authorities,” said Judy Shelton,senior fellow of the Atlas Network, a free-market think tank participating in a parallel conference critical of the Fed this week, also in Wyoming. The title of her panel, “What Happens if Central Bankers are Wrong?”

Central banks for the major developed economies, including the Fed, responded to the post-financial crisis period of slow economic growth and low inflation by pushing short-term interest rates to near zero and launching bond-buying programs to drive long-term interest rates down, too.

Many central bankers say the economy would have been in much worse shape, possibly a repeat of the Great Depression, without the support. Critics like Ms. Shelton say the policies failed to produce the higher inflation or faster growth desired.

As the Fed considers when to start raising rates, officials are getting pressure from several sides. While many free-market advocates would like the central bank to move, liberal activists plan to press the Fed this week to hold rates near zero to promote economic growth and more hiring.

“The economy is too weak to warrant interest-rate hikes,” said Shawn Sebastian, policy analyst at the Center for Popular Democracy, a left-leaning group, in a statement on Tuesday.

Academics don’t provide clear direction. In competing newspaper opinion pieces this week, Harvard professors Martin Feldstein andLawrence Summers, who have served as economic advisers to Republicans and Democrats, respectively, argued for and against a Fed rate increase in September.

From the maelstrom, Fed officials are trying to respond to the unfolding economic outlook.

Atlanta Fed President Dennis Lockhart on Monday said he still expects the central bank to raise rates this year, but he didn’t say when. That marked a subtle shift since Aug. 4, when he told The Wall Street Journal he believed the economy was ready for a rate increasein September.

Current developments like “the appreciation of the dollar, the devaluation of the Chinese currency and the further decline of oil prices are complicating factors in predicting the pace of growth,” Mr. Lockhart said Monday. But, he noted, “our baseline forecast at the Atlanta Fed is for moderate growth with continuing employment gains and a gradually rising rate of inflation.”

Source: The Wall Street Journal