Business Today

No Fed rate hike likely as it monitors global pressures

Fed Chair Janet Yellen had affirmed on an increase in rates by year-end. But, in wake of global economic slowdown, led by China, experts believe an increase in rates is not likely before next year.

BT Online   New Delhi     Last Updated: October 27, 2015  | 13:39 IST
No Fed rate hike likely as it monitors global pressures
Fed Chair Janet Yellen had affirmed on an increase in rates by year-end. (Photo: Reuters)

Ahead of the US Federal Reserve's two-day policy meeting, doubts are rising that the central bank will start raising rates before next year from the record lows where they have stood since 2008. When its policymakers meet later on Tuesday, the likelihood of a rate hike is widely seen as close to zero.

The last Fed meeting in mid-September had hinted at increasing the interest rates once the US economy showed signs of strength. Fed Chair Janet Yellen had even affirmed on an increase in rates by the end of this year. But, in the wake of a global economic slowdown, led by China, that's inflicted wide-ranging consequences, experts believe an increase in interest rates is not likely before next year.

US job growth has flagged. Wages and inflation are subpar. Consumer spending is sluggish. Home sales have flattened. Investors are nervous. And manufacturing is being hurt by a stronger dollar, which has made US goods pricier overseas. Central banks in Europe and China are executing deflationary pressures in their economies.

The tightening of the US monetary policy gives the emerging economies a nightmare, but since China, in August, announced a surprise devaluation of its currency that rocked markets and escalated fears that the world's second-largest economy was weaker than thought and could derail growth in the United States, uncertainty rose manifold. Since the outlook has dimmed further, the Reserve Bank of India and central banks of other emerging economies will have more time to brace themselves for the rate hike expected to come next year.

Even though the Federal Open Market Committee (FOMC), a branch of Federal Reserve that determines the monetary policy, had predicted rates around 1.25 per cent by the end of 2015, Yellen, in her second year as the head of Federal Reserve, has said the Fed will start raising rates once it's "reasonably confident" inflation will return to 2 per cent within two to three years. She has said that confidence should be boosted by a stronger job market, which will help raise workers' pay.

Moreover, the Fed's two-day meeting starting Tuesday coincides with major central banks in Europe, China and Japan pursuing their own low-rate policies. Against that, a Fed rate hike would strengthen the dollar and thereby squeeze US exporters of farm products and factory goods by making them costlier overseas.

Even if the Fed makes no policy changes Wednesday, there's still likely to be spirited debate at the meeting as Yellen seeks consensus on the timing of a rate hike - a debate not without risks.

(With inputs from Associated Press)

 

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