Will US Fed raise interest rates?

The US central bank kicked off a policy meeting that ends Wednesday amid speculation about when the Federal Reserve will raise US interest rates - a move that would impact both advanced and emerging markets like India.

The Wall Street Journal suggested that the Fed "is about to inject uncertainty back into financial markets after spending years trying to calm investors' nerves with explicit assurances that interest rates would remain low."

US Federal Reserve Chairperson Janet Yellen is expected to announce its decision at a press conference Wednesday afternoon (midnight India time) at the end of the two-day meeting of Federal Open Market Committee's (FOMC).

Investors are monitoring whether or not the word "patient" remains in the text as an indication of when short-term interest rates might go up. "In theory, less-clear-cut interest-rate guidance from the Fed should lead to more volatility in financial markets," the Journal said.

"That's because investors will be left less certain about a key variable in every asset-valuation model: the cost of funds," it said.

USA Today also suggested that "the Fed is likely to drop a promise to be patient as it weighs interest rate hikes, clearing a path for an increase as early as June based on recent Fed guidance."

The Fed's benchmark rate has been near zero since the 2008 financial crisis, which has helped fuel the six-year bull market.

Meanwhile, after a strong start to the week, stocks ended mostly lower Tuesday as investors waited for clues on when the Fed may begin raising rates.

Ahead of the Fed meeting, IMF Managing Director Christine Lagarde warned Tuesday that emerging markets like India must prepare for the impact of a rise in US interest rates.

In a speech at Reserve Bank of India in Mumbai, she also warned that markets could be heading for a repeat of the 2013 "taper tantrum."

At that time stocks fell and interest rates rose around the world as the Fed considered winding down its "quantitative easing" bond-buying programme.

"I am afraid this may not be a one-off episode," Lagarde said. "The timing of interest-rate liftoff and the pace of subsequent rate increase can still surprise markets."

(Arun Kumar can be contacted at arun.kumar@ians.in)