US Federal Reserve set to raise rates as economy improves

The US Federal Reserve is likely to raise its benchmark interest rates today after it concludes its two-day policy meeting, as the US economy shows signs of improvement.

A rate hike would confirm that US policymakers are on course for monetary tightening as the economy nears full employment, Moody's Investors Service said in a statement Tuesday.

"If the economy begins to heat up, and wage pressures build up further, the Fed may choose to pursue a steeper rate-hike path to ensure that future inflationary pressures are contained,” said Madhavi Bokil, vice-president and senior analyst at Moody's.

If the rates are raised as expected, this will be the second increase in four months. The US Fed had last revised rates in December, raising them by 25 basis points to a 0.5-0.75 percent target range.

At the time, the US central bank had hinted at a more aggressive monetary tightening in 2017, paving the way for expectation for three hikes in the federal funds rate this year.

“At present, the market is pricing a roughly 50-50 chance of a further rate increase in June and three rate hikes this year,” Gary Dugan, chief investment officer at Emirates NBD, wrote in a note earlier this week.

Hussein Sayed, chief market strategist at global online brokerage firm FXTM, put the chances of three increases this year at 60 percent.

Chances of a fourth increase, however, remain dim with Swiss financial company UBS calling it “unlikely as long as inflation remains below trend and the USD is significantly overvalued.”

Write to Nadeshda Zareen at nadeshda.zareen@argaamplus.com