WASHINGTON • Once again, the Federal Reserve is about to make a historic interest rate decision against a backdrop of rising equity volatility, tumbling commodity prices and jitters in credit markets. This time, investors expect policymakers to pull the trigger.
Dr Janet Yellen has been preparing financial markets for a rate lift-off this week as evidence grows that the US economy is strong enough to weather tighter monetary policy.
Many market watchers were taken by surprise when the Fed held off at its September meeting, even in the wake of the first correction in the Standard & Poor's 500 Index in four years.
If Fed officials "don't do it this time, they'll look stupid", said Mr Ken Peng, a strategist at Citigroup Inc in Hong Kong. "The things that are causing the market to behave this way aren't going to be resolved if they hold off another month or two."
In the lead-up to the Dec 16 decision, investors are contending with crude below US$36 a barrel, stress in the US junk-debt market and the longest streak of losses in global equities since August.
While the financial turmoil spurred by China's yuan devaluation that month stayed the Fed's hand in September, policymakers have since signalled increasing determination to go ahead with the first rate increase since 2006.
The prospect of higher borrowing costs has helped erase US$2.5 trillion (S$3.5 trillion) from global equities since Dec 1, and stock swings have widened.
Asian stocks extended their biggest weekly decline since September yesterday, sliding 1.4 per cent, and a gauge of global emerging equities tumbled towards a 2009 low. Energy firms slipped for a ninth straight day, the longest run of losses since September 2012, as oil fell.
"I don't think the Fed will be overwhelmed by things like fund redemptions," said Mr Kelvin Tay, regional chief investment officer at UBS Group AG's wealth management business in Singapore. "If they don't raise, it acts as an overhang in the market and that will affect business and consumer sentiment. Everybody is just going to hold back. They should actually raise and get it out of the way."
Traders are pricing in 74 per cent odds that the Fed will end the era of near-zero borrowing costs tomorrow, down from 78 per cent a week ago but higher than 72 per cent at the start of the month. Before the September decision, futures showed about a one-in-three chance of a hike.
One potential hurdle for higher US rates was cleared at the weekend as Chinese economic data for last month came in better than economists projected.
"The first rate hike is almost a done deal, but there's more concern for the second rate hike or the third rate hike - if the Fed really can continue its rate-hike programme in 2016," said Mr Tomohisa Fujiki of BNP Paribas in Tokyo. "That's obviously what we have to watch."
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