US Fed gears up for rate guidance overhaul

Investors will parse the central bank’s words closely for any clues on the timing of the first US rate hike in more than eight years. Any major tweaks to its policy statement could cause ructions in financial markets as investors recalibrate bets on benchmark rates in the world’s biggest economy.

A strong run of US economic data has led Fed Chair Janet Yellen and other top officials to acknowledge the possibility they may need to raise rates sooner than they thought just a few months ago, although a surprisingly soft reading on jobs growth in August could provide some breathing room.

“The discussion itself is a testament to the underlying shift in monetary policy,” said TD Securities analyst Gennadiy Goldberg. He said ditching the “considerable time” phrase would open the door to a rate hike as soon as March, several months earlier than most investors currently expect. The Fed has kept overnight rates near zero since December 2008 and has more than quadrupled its balance sheet through a series of bond-buying programs designed to push down borrowing costs and boost investment and hiring.

Fed policymakers have said they do not expect to raise rates until 2015, and their meeting next Tuesday and Wednesday looks certain to end with no change in policy beyond a well-telegraphed reduction in the central bank’s asset purchases.

But officials will release fresh economic and interest-rate projections, extending their forecast horizon through 2017. Those, coupled with even minute changes in the Fed’s post-meeting statement, could reshape expectations for how soon and how fast the central bank is likely to raise rates.

‘US rate hike may lead to sell-off in India’

NEW DELHI: A recovering US economy has raised apprehensions that the Federal Reserve may go for an upward revision of interest rates. The rate hike, if and when it comes, may have an impact on the Indian markets and may result into an outflow of funds from both the equity and debt markets.

“If the US signals that it is in a position to hike rates then it may lead to some sell-off initially in the emerging markets though the upheaval may not be similar to that witnessed in 2013 as the US Fed may first sensitise the market. Better placed emerging markets like ours may however recover from it after some time,” said Abheek Barua with ICRIER.

Economists, however, feel that a rate hike may come in the second half of the calendar 2015. ENS