Hawkish Fed?
A hike in interest rates is expectedGetty

The Federal Open Markets Committee (FOMC) is expected to increase the US interest rate, which has been at a ten-year record low of 0.25%. Despite the low oil price, US macroeconomic data is strong enough for the Fed to introduce a rate hike, according to many economists.

An increase in the central interest rate was expected earlier in 2015, as the world heads back to pre-2008 levels of economic growth and stability. However, volatility in emerging markets is thought to have put off monetary action.

Who is Janet Yellen, chair of the Fed?

Yellen
Janet YellenReuters

The Federal Reserve chair, who took over from Ben Bernanke in February 2014, had been vice chair since 2010. The 69-year-old New Yorker is a Democrat with degrees from Brown University and Yale University.

She has worked as an academic at several leading institutions such as Harvard and the University of California, but has an even more prominent portfolio as a policymaker. She chaired Bill Clinton's Council of Economic Advisers and used to be the vice chair of the American Economic Association.

She is seen as relatively dovish, although that might have more to do with the timing of her appointment and the slow global recovery from the devastating financial crash in 2008.

Federal Reserve chair Janet Yellen sent markets diving in September when her FOMC announcement comments were more dove-like than expected. At the time, IMF boss Christine Lagarde also warned of the effects of an early rate hike on emerging markets.

"The Fed's rise in interest rates will be felt in the emerging market currencies to some extent, and they will be under some additional pressure as many have already been hit by the global commodity slump and general risk aversion to emerging market assets," said Sanjiv Shah, chief investment officer at at Sun Global Investments.

"However, as the interest rate increase has been flagged for some time, much of its likely impact is already reflected in current prices and so it is unlikely to be overly significant."

Yellen's argument in favour of a lift-off is the tight labour market in the US. The inflation rate in the 12 months to October in the country is at 0.2%. Although slightly higher than in the UK, inflation has not taken off as desired.

Looking at the labour market rather than the inflation rate is risky, economists have argued. History shows that a tight labour market will automatically push up inflation rates, but according to experts, the current economy is more global and less predictable.

The cost of borrowing is expected to go up by a quarter point to 0.5%. The FOMC decision is the most important financial event of the year, many have argued, and it will have a tremendous impact on economies and businesses.

According to a study by World First, more than two thirds (70%) of UK SMEs are unprepared to deal with currency volatility caused by a rate rise. As a rule, an interest increase will strengthen the position of the dollar.

"UK SMEs remain dangerously exposed to currency market volatility at what is a crucial time in macro-economic policy," World First chief economist Jeremy Cook said. "With the US and the UK's economic fortunes on the up while key trading partners like the Eurozone and China continue to falter, businesses must do more to protect themselves from exchange rate fluctuations in order to protect margins and facilitate further growth."