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To hike or not? Fed mulls key interest rates move

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By Alasdair Sandford  with REUTERS
To hike or not? Fed mulls key interest rates move

Decision time looms for the US Federal Reserve on whether to raise interest rates now for the first time in nearly a decade, or wait.

Economists, analysts and perhaps the Fed’s policymakers themselves are divided over the move which has a potentially huge impact not just in the States, but on the world economy.

The main federal funds rate – the banks’ overnight borrowing rate – has been virtually zero since the immediate aftermath of the financial meltdown in 2008.

Markets are now eagerly awaiting the decision of the world’s most powerful central bank.

“It’s certainly very important in that it could potentially draw conclusions to all the scepticism as to whether there will be or won’t be an interest rate increase, but it can still certainly prove to be a frustrating environment if they defer giving greater clarity as to the future trajectory of any action on the part of the Fed,” said Eric Wiegand, Senior Portfolio Manager at the Private Client Reserve of U.S. Bank.

A survey published this week of 80 economists polled by Reuters found a little over half who only last week thought the Fed would go for it, now think it will hold fire a bit longer and keep rates at the current 0-0.25 percent range.

Citigroup, Societe Generale and Bank of America Merrill Lynch reportedly expect the Fed to hike rates this week. Goldman Sachs, Morgan Stanley, Jefferies and others are said to believe such a move is unlikely.

On Wednesday markets indicated the betting was still for a hike in October or December rather than this week.

The decision hinges on whether the Federal Reserve believes the economy is robust enough to withstand a rise. It has been accused of sending out mixed signals.

The US economy has been performing relatively well, the recovery adding trillions of dollars to the balance sheet and generating little inflation.

However the Fed cannot ignore the less rosy global outlook. The fragile situation in China and the world’s emerging markets could weigh on the decision.

The announcement is due at 20.00 Central European Time on Thursday (14.00 in Washington), to be followed by a news conference.