Fed says US rate rise still likely in 2015

Federal Reserve chair Janet Yellen said yesterday (September 24th) that the US remains "on track" for an interest rate rise this year. Speaking at the University of Massachusetts, she added that a rate hike "sometime later this year" would "likely be appropriate". However, she noted that any decision will rely on inflation being stable and the US economy being strong enough to boost jobs.

Despite analysts expectations of a September rate hike, the Fed decided last week to keep rates unchanged due to fears about global economic growth. "Most [policymakers] including myself, currently anticipate… an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter," Ms Yellen said.

In line with World Bank recommendations

The Fed has followed the advice of the World Bank, who urged it to delay any rate rise until the global economy is in a more stable position. It said a September rate hike could trigger "panic and turmoil" in emerging markets.

World Bank chief economist Kaushik Basu said that rising uncertainty over growth in China and its impact on the global economy meant a Fed decision to raise its policy rate this month could lead to "fear capital" leaving emerging economies as well as to sharp swings in their currencies.

"I don’t think the Fed lift-off itself is going to create a major crisis but it will cause some immediate turbulence," Mr Basu said. "It is the compounding effect of the last two weeks of bad news with that [China devaluation] . . . In the middle of this it is going to cause some panic and turmoil."

"The world economy is looking so troubled that if the US goes in for a very quick move in the middle of this I feel it is going to affect countries quite badly," he said.

Political threats

The warning echoes a recent plea from the International Monetary Fund (IMF), who urged the US Federal Reserve not to raise interest rates this year, as it "risks adding to the growing economic and political threats to US growth".

But many analysts still bet on a 2015 rate hike. Cynthia Jane Kalasopatan of Singapore's Mizuho Bank wrote in a note seen by CNBC that the bank's view for a December rate hike "has not changed" and that overall, it acknowledges "that some caution prevail amid China's wobbles and a strong [greenback] but US data releases continue to point to a broad recovery picture".

Interest rates have been kept to near zero since the financial crisis that began in 2007, as part of a set of measures taken by the Federal Reserve to help stabilise the US economy and financial system.

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