The shadow of the financial crash is finally being cast offby George Magnus / December 14, 2015 / Leave a comment
On Tuesday and Wednesday this week, the Federal Reserve will hold its last meeting of the year. And announce its first hike for 10 years. There are at least three reasons for the heightened state of anticipation surrounding it, especially the angst about whether it will amount to a policy error. All things considered, it’s the right thing to do, probably.
First, unless something shocking should happen, it will announce a change in interest rates for the first time since the financial crisis and the arrival of ZIRP or zero interest rate policy, and a rise for the first time since 2006. It came close to this decision at its meeting in September, but backed off in the face of the global market disturbances arising from turbulent developments in China’s equity market and the strange case of the mini-devaluation of the Yuan.
Second, the Fed is out there all on its own, aside from some emerging market central banks, for example in South America and Sub-Sahara Africa, still raising interest rates to help stabilise their currencies against a resurgent US dollar. Importantly, the European Central Bank and the Bank of Japan are leaning in precisely the opposite direction as far as monetary policy is concerned, and the Bank of England is on hold for the foreseeable future.
Third, a lot of people are worried the Fed is about to commit a major error. Even though central banks don’t raise interest rates once in the belief that a one-off will suffice, many commentators and economists think the Fed may find out as soon as early next year that it will have to freeze further increases or even reverse what it has done by then. It is certainly likely that the first rise in rates is less important than the expectations built into the markets about how far the Fed will raise rates and over what period of time. At the moment, markets expect rates to rise by little more than 0.5% by the end of 2016. They could be wrong of course, but the US and the global economy should be able to withstand this sort of reduced accommodation —a superior phrase to “tightening”—possibly a little more.