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US Fedral Reserve to Act

After a long build-up that stirred waves of turbulence in global markets, the Federal Reserve finally is expected to end its seven-year crisis stance with an interest rate increase on Wednesday. Most bets are that the Fed will increase the benchmark federal funds rate for the first time in nearly a decade, signalling confidence in US economic growth even as the rest of the world is in the financial doldrums.


A move has been well-flagged for months now by Fed Chair Janet Yellen and others on her team. About 97 percent of economists surveyed by the Wall Street Journal expect the increase. Yellen made clear at the beginning of this month that she believes that longstanding arguments against an increase inflation is absent and the jobs market still shows weakness will dissolve through next year. “I anticipate continued economic growth at a moderate pace that will be sufficient to generate additional increases in employment, further reductions in the remaining margins of labour market slack, and a rise in inflation to our two percent objective," she said in a December 2 speech. If the Fed waits too long, she added pointedly, "we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals."


That speech was really intended to tell the market that, yes, they are planning to raise rates at the next meeting. The Fed's policy body, the Federal Open Market Committee, meets on Tuesday and Wednesday to weigh raising the fed funds rate, a short-term peg for interbank lending which influences rates throughout the financial system, from 0-0.25 percent to an expected 0.25-0.50 percent. The rate was pulled down to zero in an unprecedented series of very sharp cuts in 2008 as the economy sank into a deep recession. It has not budged since then, as the climb back to firm growth has been much slower than expected.


But the result of the Fed's ultra-easy money policy has been to flood the US and global economies with trillions of cheap dollars that some critics worry will spark uncontrollable inflation and new asset bubbles. Neither has happened. But Yellen, stiffly opposed to a rate increase over her first 18 months as Fed chair, has turned more in favour recently, even has some of her FOMC colleagues have remained unconvinced.


Media reports have depicted her working behind the scenes in recent months to build consensus behind a rate hike. In her speech, she conceded that she is "looking forward to" the day she can begin raising rates. The challenges are much like they were more than a year ago when Yellen said she expected the lift-off from zero around the middle of 2015.


First, although the unemployment rate has fallen steadily, to 5.0 percent now, there is still an uncommonly large number of people who have dropped out of the labour market, suggesting the recovery from the Great Recession has fallen short.



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