Exuberant US Fed Reserve may hike rates

Positive macro indicators likely to give confidence to Fed economists

Washington, Sept. 26: With the US Federal Reserve widely expected to raise interest rates on Wednesday, financial markets are focused on whether signs of an acceleration in the country’s economic growth will prompt the central bank to ramp up the pace of monetary policy tightening.

This week’s two-day policy meeting could mark the formal end of the “accommodative” level of rates the Fed has used to support the American economy since the onset of the 2007-2009 recession.

The Fed’s current policy statement has included that description of loose policy as a staple element in recent years, though officials recently have described it as out of date and likely to be removed, either this week or in the near future.

The probability the Fed will raise its benchmark overnight lending rate by a quarter of a percentage point on Wednesday, in what would be its third hike this year, is nearly 95 per cent, based on an analysis of fed fund futures contracts by CME Group.

A rate hike by Federal Reserve would attract more funds to the US, and impact the fund flow in the emerging market economies, including India.

The larger question is whether the Fed reshapes its monetary policy outlook for the next few years to factor in stronger GDP growth or whether concerns about a possible global trade war or economic slowdown cause it to stick close to its current view.

Gross domestic product has been running faster than the Fed has anticipated, hitting a 4.2 per cent annualized rate in the second quarter, according to US commerce department data released last month.

On Wednesday, the US commerce department reported that sales of new single-family homes rose in August by 3.5 per cent, a bigger increase than expected by economists in a Reuters poll, after two straight monthly declines.

Some analysts are expecting a more aggressive tilt from the Fed, whether it comes in the policy statement due to be released at 2 pm EDT (6 pm GMT), the accompanying economic and interest rate projections from policymakers, or Fed Chairman Jerome Powell’s press conference after the conclusion of the meeting. “Financial markets should prepare for a more hawkish tone,” Natixis economists Joseph Lavorgna and Thomas Julien wrote ahead of the meeting.

“Another quarter of four per cent real GDP growth coupled with faster wage gains will likely cause policymakers to err on the side of aggressiveness at some point... Investors may soon have to contend with the fact that the Fed is going to press harder to dampen ebullient economic activity,” the economists wrote. — Reuters