For comprehensive coverage of this historic event, I recommend this WSJ article as a must-read.
With the first rate hike since 2008, the Fed is raising its benchmark interest rate from near zero to a range between 0.25% to 0.50%. The Fed stressed that will likely lift it gradually thereafter in a test of the economy’s capacity to stand on its own with less support from super easy monetary policy.
Expect this story to be central financial news for a prolonged period as markets and financial commentators adjust to reflect on the winners and losers.
The most obvious highlight is that the US economy has been released from the Fed’s life support system of radical monetary policy. This has to be good news, implying a sustainability to growth in the US economy. Of course, many working class and middle class families are still struggling and have seen an erosion of living standards since the financial crash of 2008 – for the disadvantaged, the outlook will probably remain bleak, indeed it is expected to worsen as technology plays an increasing role in society..
Financial markets have responded positively around the world, especially equities and junk bonds. It will be interesting to see the broader bond market’s more considered reaction – I sense that the bond markets were expecting a more aggressive escalation from the Fed.
The rise will impact on Dollar denominated commodities, like oil, and developing countries who binged on borrowing Dollars at record low interest rates. This will all take time to unwind.
Meanwhile, attention will focus on other central banks, predicting similar rate rises. I would expect the UK’s BoE to be about a year behind and for the ECB to keep to the Eurozone in intensive care for the foreseeable future.
Of course, these expectations are based on normal projections of political stability. Extreme political events could trigger changes very quickly, so it’s worth keeping an eye on political risk.