Perhaps not, and I understand that Chair Janet Yellen has to fend off the sharp talons of the inflation hawks over there. But few expect a 0.25 percentage point increase in the Federal Funds rate to 0.5 per cent rate to prompt a destructive collapse in household spending.
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What will this first rate boost mean for consumers and what does a higher interest environment mean for the average American?
While financial markets are ready for the first 25 basis points rate hike in December, there is uncertainty over how far the rates will move up in the coming years, and how fast.
It is very important to understand that the 30-day federal funds futures is merely one of the many barometers used to judge rate hike timing. What is surprising is the U.S. stock market continued to perform well throughout the Fed tightening cycle. In many cases USD/JPY rallied before the rate hike but failed to extend its move thereafter.
The other key question macro-strategists are asking with respect to the timing of the Fed lift-off is whether or not monetary policy will be back to “normal” at the onset of the next recession.
Media reports have depicted her working behind the scenes in recent months to build consensus behind a rate hike.
If oil does bounce and the Fed does back off from a hike, or even just indicate that this is a one-off, then stocks may rise somewhat. But another is the level of commodities’ exposure in high yield, especially of marginal producers hard hit by the continuing decline in prices.
If rates do rise the cost of taking out a new mortgage in the United States will become more expensive. But last summer, financial markets tumbled after China shocked investors by devaluing its currency, fanning fears that the world’s second-largest economy was slowing more than anyone thought.
They might have to buy a different house if rates keep going up because of the affordability, but if the economy’s better, that’s what gets people to buy. It could also roil financial markets.
Plenty of factors, led by plunging oil prices, are driving market volatility right now. Retail sales gained 11.2 per cent for the best reading of 2015, while fixed-asset investment increased 10.2 per cent in the first 11 months of the year. Because the move is so highly anticipated, what matters more to the market is for the Fed to succeed in communicating clearly and assure the market of a “gradual and cautious” tightening pace.
Most importantly, expectations about its future level determine long-term interest rates on vehicle and home loans, financing for businesses and foreign governments, and savers’ deposits. The consumer price index, a measure of inflation, for November stood at 5.41%. Now, almost all economists are predicting that Fed policymakers will end their meeting on Wednesday by raising rates for the first time in almost a decade. There could be two reasons for this weak link. Those countries sometimes borrow loans that have to be paid in US dollars. But between 2003 and 2006, the euro gained.
Raising interest rates is “a huge mistake that will disproportionately hurt the neighborhoods where our folks live – low-income communities of color”, said Brianna Brown, Dallas County director for the Texas Organizing Project. The rupee is already trading at Rs 67.13 to a dollar, and may depreciate further. When adjusting for inflation and employment growth, the Fed has kept to federal funds rate nearly 4% below where it should be (based on a forked-Taylor rule). The Fed’s fall projections fell just shy of that goal at a median of 3.5 percent. Indian exporters, at least, have no need to worry on account of the rate hikes. By the end of next year, the US will probably still be at historical lows. Bonds denominated in dollars accounted for the rest of the borrowings. The Nobel economics laureate Paul Krugman argues: “The clamour for higher rates has nothing to do with the public interest”. Repayment amounts will also rise with dollar appreciation. But the turmoil complicates the central bank’s communications challenge, particularly the need to wrap the hike in heavily conditional and responsive packaging.
The Fed is, therefore, likely to take only measured steps without destabilising the global economy.
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