Analysts said that after weeks of preparation a surprise decision not to hike would be the more disruptive choice.
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The Federal Reserve looks nearly certain to raise short-term borrowing rates on Wednesday, ending an extraordinary period of government intervention in the financial markets that started at the height of the recession. The flash composite output index fell to 50.3 in December from 51 in November.
In the US, futures point to a higher open on Wall Street.
Three months after the Fed dropped rates to zero in December 2008, the Bank cut Britain’s core interest rate to 0.5 per cent and has not moved them since.
But how much and how fast could the Fed raise rates in the coming months?
The Federal Reserve is 99% likely to raise interest rates Wednesday for the first time in years. And it could weaken Asian currencies against the dollar, potentially boosting the trade-reliant region’s exports.
The FTSE 100 index added 0.8 percent.
The overall materials group, which includes gold and base metal miners, fertilizer stocks and others, climbed 2.4 per cent. “For investors, the Fed decision is very important”. Germany’s DAX was little changed.
But most analysts believe the Federal Open Market Committee, the Fed policy board, will take the first step, and then see what happens before plotting their next move. They’ll also want to see whether she’s concerned about problems that could result from a divergence in policy among central banks: Once the Fed raises rates, it will be at odds with some of its counterparts, including the European Central Bank, which are trying to lower rates. The jobs market is strong enough given unemployment in the USA has halved since 2009 and wages are starting to pick up.
Some experts say higher American interest rates could increase capital outflows from China, put downward pressure on the yuan and complicate Beijing’s efforts to avoid a sharp economic slowdown.
BANDAGE COMES OFF: Stephen Freedman, senior investment strategist at UBS Wealth Management Americas, said the Fed is “taking off the Band-Aid” because the economy has substantially healed in the last seven years.
The rise is part of a global rebound that also saw USA benchmarks post their biggest gains in a week. And unlike the taper tantrum, this move has been “well signaled and should already be priced in”, he says – meaning investors have had plenty of time to make their moves and that a destabilizing rush for the exits is unlikely.
The Fed’s policy statement noted the “considerable improvement” in the US labour market, where the unemployment rate has fallen to 5 percent, and said policymakers are “reasonably confident” inflation will rise over the medium term to the Fed’s 2 percent objective. When the Fed held off on raising rates in September, the shaky global economy was a key reason. She’s rejected the possibility of returning to the formula the Fed used from 2004 to 2006, when it raised its target for the federal funds rate by a quarter-point at 17 consecutive meetings.
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The rate hike will separate the Fed from major central banks in Tokyo, Frankfurt, Beijing and elsewhere that are all battling to stimulate their economies and generate growth.
