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Will the Fed finally raise interest rates?

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Federal Open Market Committee had declined to raise rates seven times this year

WASHINGTON There is little doubt the US Federal Reserve will raise the benchmark interest rate this week for only the second time in a decade.

With unemployment at a nine-year low, jobs being created at an average of 180,000 each month, the economy growing at better than 3 per cent in the most recent quarter and some signs of a pick-up in inflation, the writing is on the wall.

Some members of the Federal Open Market Committee (FOMC) - which sets the key federal funds rate, the basis for mortgage and lending rates - even cautioned that failing to raise rates this month could harm the central bank's credibility, given expectations set by policymakers in recent months.

"All the necessary and sufficient conditions are there," Mr Mark Zandi, chief economist at Moody's Analytics, told AFP.

With a rate hike assumed, the question remains whether Wednesday's move will be the first in a series.

That was what central bankers thought was going to happen a year ago, when they announced the start of the "normalisation" of interest rates after keeping them at zero in the wake of the 2008 financial crisis.

But the Fed's efforts to turn the page on monetary stimulus with gradual tightening quickly went off track, despite forecasts for up to four rate hikes this year.

Seven times this year, the FOMC declined to raise rates, impeded by poor US economic data, Britain's shock June vote to exit the European Union, and above all, by fears of interrupting a fragile recovery.


And analysts said there are no guarantees next year will see the beginning of a tightening cycle either, given uncertainties in geopolitics and the undetermined policies of US President-elect Donald Trump.

A Wall Street Journal poll of economists this week put the Federal funds rate at an average of 1.26 per cent by December next year, implying four rate increases. A Reuters poll projects three rate increases.

The ratings agency Fitch also said it expected US debts and deficits to rise under a likely Trump stimulus plan.

But Mr William Dudley, the influential FOMC vice-chair and president of the New York Federal Reserve Bank, said in a speech that Mr Trump's victory created "considerable" uncertainty, and it was too early to say whether the Fed's plan for gradual tightening would have to be adjusted.

Fed futures do not expect a sudden rush of higher rates: the CME FedWatch tool does not forsee a 2017 rate hike before June.

Mr Zandi of Moody's Analytics is expecting three rate increases next year, with policymakers waiting at least until spring to see what the Trump administration will do.

But Mr Trump's win changed things, he said.

"With the election, I think the political dynamics have shifted," said Mr Zandi, who in June produced a report critical of Mr Trump's policy proposals.

Mr Jim Glassman, managing director and chief economist for commercial banking at JP Morgan Chase, believed the Fed missed an opportunity by putting off rate hikes this year as its worst fears failed to materialise.

"I think the economy's doing fine," he told AFP.

"The Fed taking its foot off the gas is not going to derail the US economy." - AFP

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