December 14, 2015

THAT '70'S SHOW

Is the Fed's interest rate hike a major error? (George Magnus, December 14, 2015, The Prospect)

[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. 

I imagine the Fed's policy-makers are well aware of the risk and have no intention of following in the footsteps of the 15 OECD central banks that have raised interest rates since 2011 only to reverse the increase(s) subsequently, and in some cases, take interest rates down to lower levels than where they began.

This hike has nothing to do with existing economic conditions.  It's just the obligatory action of a new Fed chairman to prove their inflation fighting bona fides to the industry, which still fears a return of the inflation of the 1970's.  Greenspan and Bernanke both took similar actions, nearly triggering and probably triggering recessions respectively (we won't know for another decade whether 2008 officially qualifies).

Posted by at December 14, 2015 12:28 PM

  

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