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 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.
As of September, Fed officials expected perhaps four rate hikes next
year.
"The statement....should be relatively hawkish. The Fed will look to
project confidence," the analysis said.
Though modest, the Fed's token first step remains fraught.
In the days to come the Fed will have to prove that a new set of
tools for managing interest rates will work as expected; see how
higher U.S. rates affect domestic and global financial conditions;
and hope that weak world demand and commodity prices do not lead to
an overall bout of deflation and force the Fed to reverse course.
To be considered a success, the Fed needs its rate hike to be
followed next year by continued U.S. growth, continued low
unemployment, and, perhaps most in doubt, a turn higher in
inflation.
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For all the talk of abnormal times and changes in underlying
economic fundamentals, the Fed is pinning its hopes on a very
conventional premise - that the U.S. consumer will keep spending at
recent strong rates, encouraged by low unemployment and the apparent
beginnings of a rise in wages.
"The American consumer is in full gear and there is nothing but
tailwind...They are right to be confident," said Mark Zandi, chief
economist with Moody's Analytics.
The turn toward higher rates has been months in the making.
The Fed under Yellen has carefully stripped its policy statement of
most future-oriented promises to keep rates low, along with ending
crisis-era asset purchase programs.
With unemployment falling steadily through the year, there has been
steadily less justification for crisis-era policy, and a sense among
policymakers that they could balance the higher rates sought by
"hawks" with a slow pace of subsequent increases.
Still, opinion is not unanimous. Some Fed policymakers have said
they worry the world economy is too weak for the Fed to successfully
march off on its own. Labor groups on Tuesday said pockets of
employment and wage growth overall are still too weak to warrant
tighter financial conditions.
"There’s no reason to think that the pace of economic growth today
is excessive and needs to be slowed because of incipient inflation,"
Josh Bivens, research director at the Economic Policy Institute,
said in calling on the Fed not to hike.
"Right now, lower unemployment that boosted wage and price growth
would be an affirmatively good thing. Wages and prices are clearly
growing too slowly."
(Editing by David Chance and Chizu Nomiyama)
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