US Federal Reserve meets on historic rate rise

Washington: The Federal Reserve begins meeting Tuesday to weigh a landmark interest rate increase that will signal the end of more than seven years of crisis-era, easy-money monetary policy.

With the US economy growing steadily at a modest pace, the Fed is expected to conclude that it is time to get away from the ultra-low interest rates that have underpinned the recovery from the 2008-2009 Great Recession.

Some economists inside and outside the US central bank believe the economy is still not ready for tighter money, or that there is still no compelling reason to raise.

But most analysts believe the Fed will decide nevertheless on a hike in the federal funds rate that should begin a series of increases over the coming two years.

Fed Chair Janet Yellen said in a December 2 speech that the Fed expects the economy will continue to grow slowly but steadily and that, even though inflation remains low and there is still significant slack in the jobs market, both issues would disappear next year.

Moreover, she added, if the Fed waits too long, "we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals."

"The Fed is not trying to slow down a fast-growing economy or dampen runaway inflation," Sam Stovall, equity strategist at S&P Capital IQ. A hike would be "an attempt to recalibrate, not restrain."

Vincent Reinhart, a former Fed official now with the American Enterprise Institute, said that raising the rate "buys Chair Yellen the credibility with her colleagues and market participants to tighten slowly subsequently."

The FOMC meets over Tuesday and Wednesday and will announce its decision at 2 pm (1900 GMT) Wednesday, along with FOMC members projections for growth, inflation and interest rates over the next two years. 

Shortly after that, Yellen meets the media to explain the decision.

What most economists expect is that the federal funds rate will be lifted from the current level, 0-0.25 percent, by a quarter percentage point. 

The benchmark rate is a short-term peg for interbank lending which influences commercial rates throughout the financial system.

It was cut to near zero in 2008 to help the economy survive the worst recession since the 1930s, and has sat unchanged during what became a much longer than expected recovery.

But with inflation and the employment market still well away from the Fed`s targets, some question whether it needs to act now, especially as much of the rest of the world is moving in the opposite direction, easing monetary policy, to counter weak economic growth.

Even so, the Fed has so strongly signalled the decision that it can hardly not raise the rate without scaring markets.

"Given the strength of the signals that have been sent it would be credibility-destroying not to carry through with the rate increase," economist and former US Treasury Secretary Larry Summers wrote in a blog post Tuesday.

Most will be watching for what the FOMC forecasts, and Yellen`s comments, indicate about the expected pace of economic growth and future rate increases.

Crucially, expectations about the future level of the fed funds rate determine long-term interest rates on car and home loans, financing for businesses and foreign governments, and savers` deposits.

Yellen has repeatedly said that the liftoff from zero will initiate a series of increases whose pace will depend on how the economy reacts -- slower if there is weakness, and faster if it picks up strength.

Speculation ranges from between two and four increases next year, depending on inflation.