Will the Fed increase interest rates?
September 16, 2014, 10:49 pm

Markets around the world are eagerly waiting to see if the US Federal Reserve will take steps toward increasing interest rates [Xinhua]

The Fed is expected to make an announcement on its forecasts for the period 2015-2017 on Wednesday afternoon.

Investors and market analysts have for weeks speculated that the Fed’s Open Market Committee (FOMC) could inch closer to an interest rate increase policy change reflecting overall confidence in a strengthened economy that has in 2014 appeared to weather a number of hiccups.

Asian shares slipped on Tuesday; Japan’s Nikkei Index fell 0.2 per cent for the first time in five weeks on speculation that the Fed’s interest rate increase would come sooner than later.

European stocks also fell with France’s CAC-40 leading the pack at 0.4 per cent slump. Germany’s DAX fell 0.3 per cent and Britain’s FTSE 100 dropped 0.2 per cent.

In the US, however, the Standard & Poor’s 500 index, the Dow Jones Industrial Average and the Nasdaq Composite registered moderate hikes of 0.6, 0.5 and 0.4 per cent, respectively.

US Fed chief Janet Yellen, experts believe, could announce rate increases to begin in 2015, marking the first time since 2006 the Federal Reserve has made such a move.

Interest rates have been near-zero since the US sub-prime mortgage crisis of 2008 – which plunged many global economies into recession – in a bid to prop up consumer spending.

The Fed launched a bond buy-back stimulus mechanism (Quantitative Easing) capped at $85 billion since 2009 in a bid to keep markets growing. As the unemployment levels fell and market prospects improved, the Fed began tapering its stimulus fund.

But some analysts said August lower-than-expected employment data was a major setback and could stall the Federal Reserve’s prospective plans to raise interest rates in early 2015.

However, others said the low figures are but a minor bump as the US economy stabilizes toward continued growth following an otherwise robust summer.

Other statistics may bear that out.

The US unemployment rate fell from 6.2 to 6.1 per cent in August, the Labor Department said – that’s a more than 1 per cent drop since the same period last year.

There was also good news regarding GDP growth.

Following a depressing first quarter this year in which the economy shrank at an annual rate of 1 per cent due to harsh wintry weather (nicknamed the ‘Winter Chill’), revised data indicated that second quarter growth was at 4.2 per cent.

Overall, the first two quarters combined have shown consumer confidence strengthening, the housing sector growing and US manufacturing activity rebounding to record highs in the past 42 months.

The BRICS Post with inputs from Agencies