Fed opens meeting to put an end to crisis era policy

Tue Dec 15, 2015 4:17pm EST
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By Howard Schneider

WASHINGTON (Reuters) - Eight years after a devastating recession opened an era of loose U.S. monetary policy, the Federal Reserve on Tuesday began a two-day meeting at which it is expected to turn in the other direction and raise rates in an increasingly normal economy.

The decision will be released on Wednesday at 2 p.m. (1900 GMT), with markets prepared for an initial 25 basis point "liftoff" that would move the Fed's target rate from the zero lower bound to a range of between 0.25 and 0.50 percentage points. It is to be followed by a news conference by Fed Chair Janet Yellen to elaborate on the central bank's latest policy statement.

Markets on Tuesday set a positive stage for the Fed's potentially historic turn. U.S. stock indices were up around one percent, bond yields moved higher, and analysts said that after weeks of preparation a surprise decision not to hike would be the more disruptive choice.

"Given the strength of the signals that have been sent it would be credibility destroying not to carry through," former Treasury Secretary Larry Summers, a skeptic of the need to raise rates right now, said in remarks published Tuesday on his website.

The rate hike will separate the Fed from major central banks in Tokyo, Frankfurt, Beijing and elsewhere that are all battling to stimulate their economies and generate growth.

The initial hike expected on Wednesday will still leave U.S. policy extremely loose, and Fed officials have signaled they will act cautiously from that point forward to nurture a tepid recovery.

Markets and analysts will focus on the exact language the Fed uses in its statement to justify the hike and describe how it will evaluate the timing of a second and subsequent steps.

Analysts at TD Securities said they expected the statement and updated economic forecasts from policymakers to take a hawkish tilt that emphasizes every meeting will be "live" for a possible hike.   Continued...

United States Federal Reserve Chair Janet Yellen appears before a Joint Congressional Economic hearing on "The Economic Outlook" on Capitol Hill in Washington December 3, 2015.     REUTERS/Gary Cameron