As economy picks up, US Fed expected to hold off on rate hike

Analysts expect the Federal Reserve to hold off on raising interest rates as it opens a two-day policy meeting on Tuesday, despite the economy's rebound from a winter stall.

But the Federal Open Market Committee, led by Fed Chair Janet Yellen, is clearly nearly ready for the first increase in the benchmark federal funds rate in nine years.

Evidence shows the US economy is rebounding from a surprise contraction in the first quarter, with consumers spending more, a rebound in job creation and wages beginning to rise.

That leaves less and less justification for holding the rate at the zero percent level, where it has been since the 2008 crisis.

But there are enough question marks -- weak industrial output, the negative impact of an already strong dollar, and low inflation -- that the Fed will stay patient to see what happens over the summer. Many analysts are now focused on September for a rate increase.

This week's meeting comes at about the very time that, a year ago, the FOMC was expected to announce a rise in its benchmark federal funds rate, the start of a series of increases.

Anticipation of the move has sent tremors through financial markets and the global economy, stoking volatile swings in currencies and interest rates that have sparked some capital outflows from emerging economies.

- Pressure to wait -

The Fed itself appears anxious to get over the first hurdle toward "normalization" of monetary policy, after years of easy money that some say is fueling new mini-bubbles in some asset markets.

But there is also pressure to hold back until there are clear signs the US economy and the world economy will not be set back by an increase.

In recent weeks both the International Monetary Fund and the World Bank have urged the Fed to wait until early next year for "lift-off".

"While the Fed is not expected to begin raising rates tomorrow, it is possible, and we expect a few FOMC members will make the case, especially after two solid employment increases and evidence of accelerating wage growth," said Chris Low of FTN Financial.

"In the end, however, the Fed is likely to continue to make the case for a hike later this year."

The FOMC has repeatedly said the causes of the winter stall in the economy were mostly "transitory."

Since April, the data which the FOMC studies to decide whether the economy can handle higher rates -- inflation, employment and wages -- have all shown signs of improvement.

For Yellen, the key is to see firm signs of tightening in the jobs market, even if inflation stays low, and the May job creation report, released on June 5, showed the best signs yet of that.

A huge 280,000 jobs were created, and the market absorbed a surge of returnees. Wages turned up at the same time, another sign of tightening.

But the other data has been mixed. Consumer spending has risen, but mainly on cars; otherwise, US shoppers seem very cautious.

Prices are weaker than the Fed -- which wants to see inflation around two percent -- favors.

Still, most economists see that the picture of strength is becoming clearer by the day, and the issue is how soon the FOMC will move, and how they will signal that in their policy statement on Wednesday.

Deutsche Bank said it expects Yellen, who will speak to reporters after the meeting, "will reaffirm the case for beginning the process of policy normalization sometime later this year."

"The Fed surely wants the option to hike in September, data permitting," it said.