The Fed did what was expected yesterday and increased interest rates. But it is what its latest statements imply about the year after next, after next that is more interesting.
December 2014: Markets pencil in several rate hikes for the year ahead in the US and UK, and the US Federal Reserve and Bank of England drop hints that this may happen. The reality: In 2015, US rates go up once and UK rates stay on hold.
December 2015: Markets pencil in several rate hikes for the year ahead in the US and UK, and the US Federal Reserve and Bank of England drop hints that this may happen. The reality: In 2016 US rates go up once and UK rates are cut.
December 2016: Markets pencil in several rate hikes for the year ahead in the US, but expect rates to either stay on hold or be cut in the UK, and the US Federal Reserve and Bank of England drop hints that this may happen.
And so the Fed increases US rates so that they are now in the range of between 0.5 and 0.75 per cent. It has also hinted at three rate hikes next year – which has caused consternation as the markets had only priced in two rate hikes (shock horror). As for 2018 and 2019, the Fed is suggesting that US rates will carry on rising, implying they will hit three per cent in 2019.
The dollar went up on the news, stocks fell slightly.
Fed chair, Janet Yellen suggested that Trump’s planned one trillion dollar stimulus policy had some effect on the decision to increase rates. Ms Yellen put it more tactfully than that, simply saying that some members of the FOMC, the Fed’s rate setting committee, were influenced by planned fiscal policy in making their decisions.
More controversially, she also said: “I would judge that the degree of slack has diminished. I would say at this point that fiscal policy is not, obviously, needed to help us get up to full employment.” So, that appears to be a real dig at Trumponomics.
Regarding talk that she may resign, Ms Yellen said: “I do intend to serve out my four-year term. I haven't made any decision about the future. I recognise I might or might not be reappointed. It's a decision I don't have to make and don't have thoughts on at this time. As you said I recognize too that I could stay on as a board member, and that's a decision for another day."
As for Mr Trump and the independence of the Fed, she said: "Well I'm not going to offer the incoming President advice about how to conduct himself in policy. I'm a strong believer in the independence of the Fed. We have been given the independence by Congress to make decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and inflation, and that is what I intend to stay focused on. That is what the committee is focused on."
All eyes now turn to emerging markets.
Back in the 1990s, when US interest rates were increased, the result was a chain of events that led to money flowing from Asia into the West, with the Asian crisis of 1997 and the Russian crisis of 1998 the result. Many fear a repeat of this, and indeed we saw a mini crisis in emerging markets a couple of years ago, so called taper tantrum, when the Fed began talking about ending QE. But the planned rate hikes have been telegraphed well in advance, emerging markets reliance on US money is not what it was in the late 1990s, if we do indeed see another crash, then the ability of the markets to anticipate things and learn from history really is awful.