US Fed Reserve may raise interest rates by midyear

Washington, March 19:

In a move that would likely impact both emerging markets like India and advanced economies, the US central bank Wednesday dropped an assurance to be “patienta” in raising interest rates and signaled the hike could come by mid year.

DOLLARBut in a statement issued after a two-day meeting of its policy-making committee, the Federal Reserve also emphasised that it might still delay the decision to raise the rates for the first time since the 2008 financial crisis, until later this year.

The Fed’s announcement moved the central bank to the verge of ending a period of more than six years in which it has held short-term interest rates near zero.

“Just because we removed the word patient from the statement doesn’t mean we are going to be impatient,” Fed chairperson Janet Yellen said at a press conference here at the end of Federal Open Market Committee’s (FOMC) two-day meeting.

In a statement issued after the meeting, the committee said it will be appropriate to tighten “when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.”

The central bank stressed that it has not decided on the timing of the initial increase and that action is “unlikely at the April meeting.”

“The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective,” it said.

Striking an optimistic note about the economic outlook for the US, the committee said it “expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace.”

The stock market surged on the news. The Dow was falling over 100 points before the Fed statement and is now over 100 points higher.

Dropping “patienta” gives the Fed more options on when it wants to raise interest rates. While the expectation is for an initial rate hike in June, the Fed has repeatedly said that it will only take action if the economy stays healthy, CNN said.

“Removing the word ‘patience’ simply gives the Fed flexibility,” it said citing Greg Valliere, chief political strategist at Potomac Research Group.

The key factors the Fed will be watching as it decides when to raise rates are hiring, inflation, economic growth and the increasingly valuable — perhaps too valuable — US dollar, CNN said.

Ahead of the Fed meeting, IMF Managing Director Christine Lagarde had warned that emerging markets like India must prepare for the impact of a rise in US interest rates.

In a speech at Reserve Bank of India in Mumbai Tuesday, she also warned that markets could be heading for a repeat of the 2013 “taper tantrum.” IANS

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