Opinion – Fed Raises Rates After Seven Years Near Zero, Expects ‘Gradual’ Tightening Path – WSJ

For comprehensive coverage of this historic event, I recommend this WSJ article as a must-read.

Source: Fed Raises Rates After Seven Years Near Zero, Expects ‘Gradual’ Tightening Path – WSJ

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.



Paul Krugman against December rate hike – Business Insider

Paul Krugman, Laureate of the Sveriges Riksban...

Paul Krugman, Laureate of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2008 at a press conference at the Royal Swedish Academy of Sciences in Stockholm (Photo credit: Wikipedia)

The Business Insider cites Nobel winning economist, Paul Krugman, writing in his NYT blog. Krugman claims, “The arguments against an early rate rise remain compelling, and shouldn’t be abandoned based on one month’s data.”

Source: Paul Krugman against December rate hike – Business Insider

Personally, I agree with Krugman. It’s too easy for one month’s statistical data to have rogue spikes. It’s better to look at the trend over several months.

In my view, the Fed would be cautious of acting prematurely on interest rates and then having to reverse it – this would be a major embarrassment.