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Markets on edge for Fed plans on rate hike

The World Bank warned emerging economies around the world Wednesday of a rocky road ahead as the US moves toward tightening monetary policy and the dollar strengthens

Currency and bond markets were on edge Wednesday ahead of the outcome of the Federal Reserve's policy meeting, expected to make clearer plans for a possibly midyear interest rate increase.

Most analysts believe the Federal Open Market Committee's policy statement, to be released at 1800 GMT, will drop its insistence that it "can be patient" before increasing the federal funds rate, the benchmark that has sat at zero for more than six years to pull the economy back from crisis.

That phrase has stood between FOMC policymakers' caution and firm commitment to take the step for a rate increase this year.

Fed Chair Janet Yellen has said several times that removing that phrase would signal a possible rate increase within two or more FOMC meetings, which would point to June at the earliest. And since last year, FOMC projections have pointed to the rate liftoff around the middle of the year.

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The move would confirm the stark divergence between US monetary policy and that of other central banks around the world. With the US economy growing solidly, the Fed is clearly on a tightening path, heading toward policy "normalization" after being on a crisis footing since 2008.

Meanwhile central banks in Europe, Japan, China, and a host of next-level economies are easing, pumping out more easy money to fend off recession and deflation.

The consequences of divergence have been challenging on all sides. The dollar has surged about 20 percent against a trade-weighted basket of currencies in one year. Against the euro, it has soared 32 percent; against the yen, 18 percent.

That has made exporters to the US more competitive but raised the price of crude oil they import; it has hiked the cost of capital -- dollars -- needed by developing countries and sucked investment funds from foreign markets toward the United States.

It has also left markets far more volatile and unpredictable.

What the FOMC statement, its projections, and Yellen, in a post-meeting press conference, say about the path forward for rates could either calm or boost that volatility.

Even if an initial fed funds rate increase is confirmed for the coming months, how aggressive or cautious the FOMC will be in further rate increases is the focus of Fed analysts.

"It is not only the language around 'patience' that matters for rates and the dollar," said Nomura analysts in a research note.

"As we get closer and closer to liftoff... the Fed's projections for the economy and rates should have a more powerful signaling effect."

Given the still-frail state of the global economy elsewhere, some say the FOMC should remain patient.

"Lower oil prices and the appreciation of the dollar make it appropriate for the Federal Reserve to wait longer to raise policy interest rates," the Organisation for Economic Co-operation and Development said in its global outlook earlier Wednesday.

But most expectations are that "patience" will be gone.

Having built up market expectations over the past six months, "the Fed will not try to upset the apple cart," said Societe Generale.

"The Fed will basically try to slip in the message of incoming rate hikes as delicately as possible without upsetting the market too much."