Financial markets that have been buffeted by the prospect of the first US interest rate hike in almost a decade are buckling up as the Federal Reserve begins meeting Wednesday to weigh its decision.
An uncommon debate has raged over whether the US central bank should go ahead with a quarter-point increase to the federal funds rate that would nevertheless mark a crucial break with the Fed’s crisis stance since 2008. By most assessments the US economy, with unemployment at 5.1 percent and moderate growth, is strong enough now that holding the rate at zero percent is no longer warranted. The initial increase would likely begin a series of increases toward more “normal” levels around 3.0 percent over the next couple of years.
But to many economists, the slowdown of global economic activity, particularly in China, now poses a risk to US growth and an interest rate hike could set the economy back. And many others say it could cause new problems in nervous global markets at just the wrong time. The World Bank warned in a report Tuesday of a “perfect storm” of dangers, including a freeze in capital flows, for developing countries as the Fed tightens monetary policy.
“Given the substantial risks involved, they would do well to buckle their seatbelts in case the ride gets bumpy,” said Carlos Arteta, lead economist in the Bank’s Development Prospects Group. The policy-setting Federal Open Market Committee, led by Fed Chair Janet Yellen, will meet on the issue Wednesday and Thursday, announcing their decision at 1800 GMT Thursday.
Then Yellen will undertake the delicate challenge of explaining the decision in a press conference, with whatever she says as crucial to markets as the decision itself.