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US Fed set to raise interest rates

Members were divided over the summer about the dangers of inflation and the timing of interest rate increases.

Published: 14th December 2016 11:52 PM  |   Last Updated: 14th December 2016 11:52 PM   |  A+A-

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A tour bus passes the United States Federal Reserve Board building (rear) in Washington October 28, 2014. | REUTERS

By AFP

WASHINGTON: The US Federal Reserve on Wednesday was widely expected to increase interest rates for only the second time in a decade when it wraps up a two-day meeting, the central bank's first since Donald Trump's election victory.

Members of the Federal Open Market Committee, which sets interest rates, were divided over the summer about the dangers of inflation and the timing of interest rate increases, with the more dovish central bankers pointing to slack in labor markets and the absence of clear signs of inflation.

But robust hiring, strong third-quarter growth and unemployment at a nine-year low have strengthened the case for members favoring a rate hike.

Official figures on producer prices released by the Labor Department on Wednesday also contained signs of looming inflation, supporting the view that policymakers will raise rates to keep prices stable.

With a rate hike adopted, markets will look to see what signals the Fed sends for the course of monetary policy in 2017.

As of September, the median projection among Fed members was for two rate increases next year. Fed funds futures currently expect a rate hike in June but are indecisive about subsequent increases in 2017.

But analysts say the Fed may have to raise rates more aggressively in the coming year, with Trump's new Republican administration expected to move for stimulus to jumpstart the world's largest economy.

"I expect a rate hike in December and then not one until April," Mark Zandi, chief economist at Moody's Analytics, told AFP.

Zandi said Trump's election shifted the political dynamics for monetary policy, with larger deficits and debt likely to support stimulus that may call for sharper rate increases from the Fed.

 

- Wall Street awaits decision -

 

In its report on US wholesale inflation, the Labor Department said the index for final demand producer prices grew 0.4 percent for November on a seasonally adjusted basis, surpassing an analyst forecast which foresaw an increase of only 0.1 percent.

The result pointed to an overall upward trend since sluggish summer months. Year-on-year, the index also posted its largest gain since November 2014, rising by 1.3 percent.

Berlina Uruci of Barclays said the increase should soon lead to higher consumer prices.

"Overall, this morning's report gives more evidence of continued progress toward firmer pipeline pressures," she said in a client note.

Ahead of the Fed's announcement, US stocks were flat or drifting into negative territory, with the Nasdaq unchanged and the S&P 500 and Dow Jones Industrial Average both 0.2 percent lower toward 1600 GMT. 

In Europe, shares also retreated, shrugging off earlier gains in Asia.

Stock markets have repeatedly smashed records since Trump's shock election victory last month over Democrat Hillary Clinton, on investor hopes of stimulus and reduced regulation.



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