US may start a fourth round of QE

Federal Reserve is ‘facing a quandary’ over when to hike its interest rate

Predictions of when the US will raise its interest rate continue to change and usually involve moving the expected date of ‘lift-off’ further away.

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Many economists think a 2015 rate increase could still be on the cards, albeit a meagre one.

However, just last month the International Monetary Fund showed its hand in the debate, urging the US to wait until 2016 given the weaker-than-expected economic growth.

Jim Leaviss, head of retail fixed interest at M&G Investments, said the Federal Reserve was “facing a quandary”.

“It would dearly love to begin hiking, giving it the luxury of having both a brake and an accelerator when setting policy,” he said.

“Central to Federal Reserve chairwoman Janet Yellen’s dashboard of key economic indicators are several employment metrics.

“Based on the bullishness of these indicators, a rate hike should soon become a reality.”

But Mr Leaviss said Ms Yellen and her central bank colleagues remembered the lessons of the Great Depression well.

“Remove stimulus too soon, and a rapid descent back into recession could be on the cards,” he said.

“The Federal Reserve is left gambling that it will be easier to fight inflation by hiking rates than combating deflation in an already zero-bound world.

“This in turn helps to push back the potential risk that higher rates lead to dollar strength, further affecting US corporate profits.”