US Fed expected to raise interest rates

The US Federal Reserve is this week expected to raise interest rates for the first time in seven years.

The Fed lowered short-term rates to near zero during the financial crisis in December 2008, and has held them there to stimulate the economy during the downturn.

The Federal Open Market Committee holds its next policy meeting tomorrow and Wednesday, with a decision due Wednesday night. The Fed previously said it would raise its benchmark federal funds rate from near zero following an improvement in the jobs market.

The federal funds rate, which banks charge each other for overnight loans, was more than 5 per cent in early 2007, but has been near zero since 2008.

Comments made at the Federal Open Markets Committee’s meeting in October pointed towards a 0.25 per cent increase in its target for the fed funds rate at the mid-December meeting.

Right now, inflation remains well below the 2 per cent target rate, which is one argument as to why the Fed shouldn’t raise rates. However, while the Fed hasn’t hit its inflation target for more than three years, the US labour market has been steadily improving, and a series of strong jobs reports have given officials confidence that prices can pick up.

Earlier this month, Federal Reserve chair Janet Yellen told Congress that she saw no reason to delay plans to start a slow-paced series of rate increases in December. She said a rate increase this month was "a live option" because the US economy is doing well.

She also said that if the Fed delays hikes too long, then it might have to tighten abruptly, causing more disruption.