国际英语新闻：Rates hike, all about timing for U.S. Fed

WASHINGTON, Jan. 16 (Xinhua) -- After holding interest rates near zero for more than a year, the U.S. Federal Reserve is seeking an opportune moment to reverse the trend.

    But the timing could be tricky -- raising rates too late risks inflation, while boosting them too soon could choke the recovery.

The Fed, the United States central bank, has kept benchmark rates close to zero since December 2008 in a bid to strengthen the economy in the worst recession since the 1930s.

    But in a reversal of Newtonian logic -- what goes down must come up -- the Fed has been working internally on how and when to lift rates and end its loose monetary policy.

The U.S. Federal Reserve is reflected in a car as a security officer patrols the front of the building in Washington, June 24, 2009

    On Tuesday, a top Federal Reserve official said the Fed must raise rates as the economy improves or risk losing public confidence in its mandate to keep inflation in check.

    Charles Plosser, president of the Reserve Bank of Philadelphia, known for his anti-inflation stance, said Tuesday that the Fed's policy must be preemptive.

    The Fed will need to withdraw the ocean of liquidity it has poured into the economy and begin to boost interest rates as the economy and financial markets continue to improve, he said.

    If it fails to do so, rising inflation expectations could spur workers to clamor for higher wages and companies to increase prices. That would set off a burst of inflation, Plosser said.

    The Fed has not yet announced when it plans to raise rates, and many analysts believe it will not do so until the second half of 2010.

    The Fed is scheduled to end its 1.25 trillion U.S. dollar purchase of mortgage-backed securities in March, although it remains unknown whether that will be coupled with a rate increase.

    While some experts said a rate boost might not happen for a while, others said the Fed could not wait too long for fear of inflationary effects as the economy rebounds.

    "If they wait they are going to blow it," said Andy Busch, a global currency and public policy strategist at BMO Capital Markets, "And it won't be just some inflation, it will a lot of inflation."

    "If inflation ignites to three and half or four percent, you've got a problem," he said.

    Robert Johnson, associate director of economic analysis at Morningstar, an independent research provider, said of Plosser's assessment, "I think it's wise. I think we are going to have more growth and more inflation than people think."

    Waiting too long could cause problems such as those seen in the run-up to the recession, when low rates helped ignite the housing bubble, he said.

    "They wouldn't want to wait until unemployment goes down to around, say, 7 percent to raise interest rates," he said.

    Johnson expressed optimism on the economy's short-term prospects, although inflation may lurk down the road.

    "I think our pockets will be stronger than we think but inflation will be worse than people think," he said, adding that "employment will be better than what people think."

    Ben Carliner, director of research at the Economic Strategy Institute, said the timing of the Fed to withdraw its easy monetary stance would be important, but it is much too early to think about raising interest rates.

    The U.S. is unlikely to see rising inflation in 2010. As long as individuals, corporations and banks continue to try to save money to pay off their debts and strengthen their balance sheets, private sector demand will not be strong enough to power a robust recovery, he said.

    "But the Fed should be wary of acting too soon, thus choking off any recovery before it really gets going," he said, "That is exactly what happened to Japan as it struggled with deflation in the 1990s and 2000s."

    Some economists fret that a rate raise would rock the economy just as it is regaining its footing.

    Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said recovery needs to be firmly rooted before the central bank reverses course and begins to up rates.

    Douglas Elliott from the Brookings Institution said a rate increase would have a negative impact on the housing market, a major concern the Fed must consider when it begins tightening.

    Housing is always affected by rate increases because it directly boosts the monthly payments that house-buyers would have to make, Elliott said.

    Some fear a hit to housing could lead to fewer home sales and less new house construction, impacting real estate professionals, homebuilders and contractors.

    Johnson said housing was unlikely to take a hit, as the affordability index -- a measure of the financial ability of Americans to buy a house -- shows homes are more affordable than in previous years.

    Autos are similar.

    "If interest rates go up a quarter or half a percent higher it doesn't kill affordability," Johnson said, "Autos and housing will be somewhat impacted but (the impact) will be muted."

    A rate increase would "put more interest in savers' pockets and create more opportunities for banks to make money," he said, "A small up tick in interest rates isn't going to kill us."