Fed edging closer to first rate hike
Bart Van Craeynest, head of the Economic Research department at Petercam, analyses the impact of a first rate hike by the Fed on financial markets.
In the past few months financial markets have seen fireworks from central bankers in Japan, Switzerland and (especially in recent weeks) the Eurozone. Eyes will again shift to the US where the Fed holds its policy meeting on 17-18 March.
The Fed is clearly in a totally different state of mind than the ECB and the BoJ. While the latter are still injecting more stimulus, the Fed is heading towards a first rate hike. This will have major implications for financial markets.
The US economy has basically returned back to normal from the 2008 crisis. Slack in the economy has all but disappeared: the capacity utilisation rate is back at its 40-year average and at 5.5% (down from 10% at the end of 2009) the unemployment rate has fallen back to its normal level.
While the economy has returned to normal, monetary policy is still far from it. For the moment, inflation is still quite low, thanks mainly to lower oil prices. That said, there are signs that wage growth is set to accelerate as the labour market continues to strengthen.
Against this backdrop, the Fed is likely to seriously start looking into a move towards raising interest rates.
To be clear, there is no real urgency for the Fed to start raising its policy rate. Still subdued inflation and the depth of the previous crisis could be reasons to postpone rate hikes somewhat longer.
However, in light of the time lag for monetary policy actions to impact the real economy and the continuing recovery (especially on the labour market), the moment to start a gradual tightening of monetary policy is rapidly coming closer. That also seems to be the line of reasoning of the Fed.