Federal Reserve likely to start raising rates later rather than sooner

MOST experts reckon that the US Federal Reserve will embark on an interest rate-raising cycle this year, the only question being the timing of the first hike.

This comes from a growing belief that the US economy is expanding at a sustainable rate of at least 2 per cent per annum, a belief reinforced last week when the Federal Open Market Committee said that it saw improvements in the labour market, with job gains "solid" and the risks to the economy and employment outlook "nearly balanced". Together with better-than-expected US second-quarter growth, broadening signs that wage growth is set for further improvement and news that nominal consumer spending bounced back after softness earlier in the year, markets are now anticipating an interest rate lift-off in September at the earliest, or December at the latest. As it stands today, market consensus leans towards an earlier, rather than later, lift-off.

Although it would be impossible for the Fed to get the timing perfect - move too early and there is a risk that economic expansion is curbed prematurely, move too late and inflation would be a threat - there are good reasons to expect the Fed to stay its hand, at least until the end of 2015 or even early 2016.