World braces for rate hike by US Fed

Eight years after a devastating recession opened an era of loose US monetary policy, the Federal Reserve was set on Wednesday to raise rates for the first time since 2006, in a sign the world’s largest economy had overcome most of the wounds of the global financial crisis.

A decision was set to be released at 2 pm (1900 GMT), with markets prepared for an initial 25-basis-point “lift-off” that would move the Fed’s target rate from the zero lower bound to a range of between 0.25 and 0.50 percentage points. It is to be followed by a news conference by Fed Chair Janet Yellen to elaborate on the central bank’s policy.

Markets set a positive stage for the Fed’s potentially historic turn as US stock futures rose ahead of the market open on Wednesday and bond markets and the dollar were steady. Analysts said after weeks of preparation a decision not to hike would be the more disruptive choice.

There were signs that the underlying strength of the US consumer-led economy would continue even after a rate rise. A hike on Wednesday would still leave US policy extremely loose, and Fed officials have signalled they will act cautiously from that point forward to nurture a tepid recovery.

Not an easy decision Though modest, the Fed’s token first step remains fraught. In the days to come the Fed will have to prove that a new set of tools for managing interest rates will work as expected; see how higher US rates affect domestic and global financial conditions; and hope that weak world demand and commodity prices do not lead to an overall bout of deflation and force it to reverse course.

To be considered a success, the Fed needs its rate hike to be followed next year by continued US growth, continued low unemployment, and, perhaps most in doubt, a turn higher in inflation.

For all the talk of abnormal times and changes in underlying economic fundamentals, the Fed is pinning its hopes on a very conventional premise — that the US consumer will keep spending at recent strong rates, encouraged by low unemployment and the apparent beginnings of higher wages.

“The American consumer is in full gear and there is nothing but tailwind...They are right to be confident,” said Mark Zandi, chief economist with Moody's Analytics.

With unemployment falling steadily through the year, there has been less justification for crisis-era policy, and a sense among policymakers that they could balance the higher rates sought by “hawks” with a slow pace of subsequent increases.

Still, opinion is not unanimous. Some Fed policymakers have said they worry the world economy is too weak for the Fed to successfully march off on its own. Labour groups on Tuesday said pockets of employment and wage growth overall are still too weak to warrant tighter financial conditions.

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