World waits for white smoke from US Fed

Frankfurt - The US Federal Reserve may give clearer hints on when it will hike the cost of borrowing in the United States in the coming week, as struggling Europe braces for a tight vote in Scotland on whether to leave the United Kingdom.

As the US economy picks up pace, its central bank is inching closer to raising interest rates, a move that will send ripples across the globe. In the eurozone, however, the European Central Bank is moving in the opposite direction in a desperate bid to rekindle growth and inflation.

The United States is shaking off the hangover from a financial crisis that hammered Europe and even knocked mighty China off its stride.

But the U.S. rebound, thanks in large part to cheap Fed money, now means Federal Reserve chair Janet Yellen will have to decide when to pare back this support.

Further hints as to when the first US rate hike in more than eight years will happen could come on Wednesday in a statement after the bank's governors meet.

"It does seem like a done deal that it is going to increase interest rates," said Paul Dales of economics consultancy Capital Economics.

"We are going into a new phase where the Fed is trying to bring things back to normal. It can send reverberations around the world economy."

Choosing when to increase the cost of borrowing in the world's biggest economy - a move expected next year - is a delicate balancing act.

Yellen and others will be trying to work out how to keep the economic recovery on a steady keel without stopping it before the effects of the upswing lead to higher wages.

By contrast, the European Central Bank recently cut the cost of borrowing to near zero and pledged to buy repackaged debt in a bid to kick-start lending to small companies.

For some, the eventual move in Washington will be good news for Europe.

"This will help to weaken the euro and a weaker euro will help countries like Ireland, Portugal and Spain to sell more to the rest of the world," said Philip Lane, an economist at Trinity College Dublin.

But for others, the contrast underscores Europe's weakness.

"America is so much further than Europe," said Joerg Kraemer, chief economist of Commerzbank. "Any hope of economic improvement here has disappeared over the Summer."