Fed expected to raise rates in US

The US Federal Reserve will take another small step this week towards raising interest rates to more normal levels. However, analyst believe that it may be close to a point where it can allow a pause in increases.

Fed officials will gather tomorrow and are widely expected to raise overnight borrowing costs, which influence rates across the economy, by a quarter-percentage point to 1.75 per cent. It would mark the third small rate increase since the Fed began tightening monetary policy in June.

While the US economy lost some momentum in recent months, Fed policymakers have expressed confidence that it has entered a self-sustaining expansion and no longer needs the ultra-low rates that were used to battle recession and a weak recovery.

"Our main direction is up," Fed governor Ms Susan Bies said last week.

As Mr Bill Cheney, chief economist at MSC Global Investment Management, puts it: "They'd like to take their foot off the gas pedal."

When Fed officials last met on August 10th, they expressed confidence an economic soft patch would be prolonged and said they expected to continue raising rates at a measured pace.

Since then, Fed chairman Mr Alan Greenspan has said the economy is already on firmer ground. "The most recent data suggest that, on the whole, the expansion has regained some traction," he told congress.

Markets are betting rates reach 2 per cent by the end of the year, a forecast that implies the Fed takes a breather at one of its last two meetings of the year - November 10th or December 14th.

Mr Sung Won Sohn, chief economist at Wells Fargo Bank in Minneapolis, said the December meeting would be a better time to "pause and look at the landscape".

He added: "Right now they will continue to raise interest rates.Number one: they believe the economic numbers justify it. Number two: in an election year it could send the wrong signal if they deviated from their task."

Indeed, while the Fed's post-meeting statement on Tuesday will be scrutinised for any sign of an impending pause, few Fed watchers expect to find one.

In fact, economists say that, in many key respects, the statement is likely to mirror the one issued on August 10th, including the retention of the measured-pace language, which would be seen as signalling a rate hike was likely in November.

"I don't think they've reached a point yet where they think they're even close to being done," Mr Cheney said.

"Unless there's some very dramatic [economic\] change, they're going to take it at least as high as 2 per cent" before any pause, he added.

The question increasingly is what happens then.

"As long as you don't believe that moving slowly is going to derail the recovery, and I don't think they do, then... they're going to want to stay focused on getting back to some normal level," said JP Morgan Chase economist Mr Jim Glassman.

In this case, normal means a level of interest rates that neither spurs nor restrains growth. Fed officials have given estimates of such a neutral rate that centre on 4 per cent, which implies the US central bank may have plenty more to do next year.

Economists are still trying to gauge what set of economic circumstances need to be in place for the Fed to pause in raising rates.

"The hurdle for the data has to be reasonably high, given the low level of the fed funds rate. As the \ gets higher, that hurdle might decline," San Francisco Fed President Ms Janet Yellen said earlier this month.

Mr William Dudley, chief US economist at Goldman Sachs, said economic data will call the tune once rates hit 2 per cent.