The US Federal Reserve is widely expected to raise short-term interest rates and end nine years of near-zero status starting 2008, a period that is being called “historic” and an “era”.
The Fed, as the US central bank is called, could announce a rate hike of between 0.25% and 0.50%, according to some reports, after a meeting of its top-policy making body on Wednesday.
India is watching the developments closely. The rupee got a mauling in the worldwide turmoil triggered in 2013 by then chairman Ben Bernanke’s remarks about a coming hike.
The hike, or no change, will be announced at the end of the meeting of the Federal Open Market Committee, followed by the traditional news conference by chairperson Janet Yellen.
Speculation of a rate hike has been rife since the Fed’s last meeting in October.
“Fed Poised to Mark the End of an Era,” ran the headline of an article in The Wall Street Journal on Tuesday on the possibility of a hike. Another publication called it “historic”.
RBI governor Raghuram Rajan too jumped into the guessing game last week, saying there is a 70% to 75% chance of a hike, which, he said, would be around 25 basis points, 0.25%.
The Fed cut interest rates to near zero in the aftermath of the 2008 world financial crisis to encourage lending, spending and investing to get the US economy back on its feet.
It did so by buying back US government securities to inject liquidity in the market through a monetary policy called Quantitative Easing, which, some say, had mixed results.
But as the economy showed signs of recovery and unemployment dropped to around 5%, which is half the recession-time peak in the US, a hike was said to be imminent.
But the Fed refused to pull the trigger, saying it wanted to see more signs of recovery. “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress – both realised and expected – toward its objectives of maximum employment and 2% inflation,” it said after its October meeting.
Over to the Fed, for Wednesday. The world will be watching.