Federal Reserve on course for September rate increase

The Federal Reserve is on course for an increase in short-term interest rates as soon as September, as it expressed cautious optimism for the US economy following a sharp slowdown that struck in the first quarter of the year.

However, interest-rate projections from the Federal Open Market Committee signalled that the pace of tightening will be slow, as officials seek to quell fears of a spike in borrowing costs.

Stronger economy

A chart of interest-rate predictions from Fed officials pointed to two increases later this year, but the committee appeared to be divided over whether that many hikes would be merited, with a number of policy makers advocating only one move.

In her last press conference in March, Fed chairwoman Janet Yellen freed the central bank's hands to raise rates as soon as yesterday's meeting but insisted she would not rush to pull the trigger.

The overriding impression at the time was one of caution, given dreary first-quarter growth and a soaring exchange rate.

Since then, some indicators have started to point to a stronger economy, including more robust hiring, firmer wages, as well as better construction spending, vehicle sales, consumer sentiment and retail sales.

The central bank said the economy was now “expanding moderately” as it pointed to better growth in consumer spending and some improvement in the housing sector, alongside a pick-up in employment.

The Fed is treading a precarious line as it attempts to signal a rate rise while damping the risk of a market tantrum that might derail global growth. Top officials have repeatedly insisted policy will be tightened only modestly, and yesterday’s forecasts from officials put the longer-run rate at just 3.75 per cent.

Some analysts say any move this year would be premature and choke off the recovery.

– Copyright The Financial Times Limited 2015