Federal Reserve expected to signal the end of zero interest rates

Federal Reserve officials have begun a two-day meeting, which is expected to pave the way for the first rise in interest rates since the 2008 financial crisis.

US policymakers meeting in Washington on Tuesday and Wednesday are expected to remove the word “patient” when they put out a statement about when to raise interest rates from their current record low.

If they drop the “patient” policy, which Wall Street widely expects, it will put the world on notice that the era of zero interest rates is nearly over.

It would mean that from June officials would be making rate decisions meeting-by-meeting, based on economic data and not committing themselves to keeping borrowing rates artificially low. Dealers have already pencilled in 17 June as the date when rates may rise.

Almost 90% of economists surveyed by Bloomberg predict the Fed officials will drop the “patient” pledge from their statement released after the two-day Federal Open Market Committee (FOMC) meeting ends on Wednesday. Some 45% of the 49 economists polled predicted rates would rise in June, 37% said they expected a September rate hike.

The FOMC has already scaled back on its near-zero interest rate pledge. In December, it dropped a commitment to keep rates super low for a “considerable time”, instead saying central bankers “could be patient” and wait for further signs that the US economy is firmly on track before raising rates.

In December, the Fed chair, Janet Yellen, said the phrase meant the committee was unlikely to move rates in its next two sessions. The FOMC repeated the language in January, effectively ruling out an increase in March and April.

Franck Dixmier, chief investment officer of European fixed income at Allianz Global Investors, said: “We expect that the Federal Reserve is going to ‘lose patience’ on Wednesday and, in our opinion, there is no justification for anything else.

“Investors need not worry, however, because we are talking about the semantics of monetary policy guidance, not the concrete actions that will drive liftoff of US interest rates later this year.

“With unemployment running at 5.5%, the US labor market booming and an economy that is growing at around 3%, the Federal Reserve has no real reason to maintain zero interest rates any longer. Hence, Yellen will almost certainly drop reference to remaining patient about raising key rates on Wednesday and, in our opinion, an initial hike is set to follow in June.”

Economists at Capital Economics said the dropping of the word “patient” would be the beginning of a return to “normalise monetary policy”.

“Even with headline inflation below zero, we then anticipate a first hike in June, with the FOMC pushing the target range for the fed funds rate to 1.00-1.25% by the end of this year and 2.75-3.00% by end-2016,” they said.

Ray Dalio, one of the world’s most powerful hedge fund managers, warned that raising rates might cause an economic crisis similar to that experienced in 1937. Dalio, founder of the $165bn Bridgewater Associates hedge fund, told investors in a note, published by ValueWalk on Tuesday.

US stock market’s were slightly down on Tuesday ahead of Wednesday’s statement. The Standard & Poor’s 500 was down 0.36% to 2,073.68 at 3pm. The Dow Jones Industrial Average was down 0.76% to 17,841.

Powered by Guardian.co.ukThis article was written by Rupert Neate in New York, for theguardian.com on Wednesday 18th March 2015 16.07 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010


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