The US Federal Reserve raised interest rates as expected on Wednesday, and at the same time revealed an acceleration in its likely schedule for future rises.
The target for the Fed funds rate was lifted for only the second time since 2006 to a range of 0.5 to 0.75 per cent.
However, the 17 Federal Reserve board members and regional Fed presidents who sat in on the rate-setting meeting substantially changed their view of how quickly rate tightening will proceed.
When the Fed’s last full set of projections was issued in September, only seven of those 17 members thought rates would be above 1.25 per cent by the end of 2017.
That has now jumped to 11 of the 17 members – as show on the Fed’s “dot plot” chart below.
That has large implications for global money markets and, on balance, suggests that the third of Australia’s mortgage funding sourced from abroad will become more expensive than expected through 2017 – potentially increasing “out of cycle” mortgage rate increases from the big banks.
But while the Fed looks forward to more interest rate rises, the board’s view of US growth is virtually unchanged.
In September, the board members thought real GDP growth would be 2 per cent in 2017, which has now been revised upwards to 2.1 per cent.
At the same time, the board members have slightly increased the expected unemployment rate – in September they thought it would be 4.5 per cent next year, but now forecast to be 4.6 per cent.
On the one hand, that tells us is that the Federal Open Markets Committee (FOMC) is keen to get on with normalising interest rates so as to cool off the speculative assets bubbles that have been a feature of global markets since the worst days of the global financial crisis in 2009.
But on the other hand, the almost unchanged growth numbers reveal a scepticism about President-elect Donald Trump’s plans to stimulate the economy.
The Fed’s not saying he won’t do it – only that while a Trump administration is splashing money around to boost growth, its efforts will be largely offset by a tightening of monetary policy.
In the understated terms common to all central bankers, the FOMC said: “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.”
Yes, but rising more quickly than previously thought.
The historical context for this rate decision is highly unusual. Unlike the first post-GFC rate increase last December, this one can more credibly be seen as the end of the global financial crisis that ravaged markets and economies in 2008 and 2009.
The 2015 increase was not seen that way by traders and economists because US GDP growth, unemployment and inflations figures were still very weak.
This time around, particularly after the shock election of Mr Trump to the US presidency, there is more optimism.
As FOMC chair Janet Yellen said at her Wednesday media conference, “many market participants expect expansionary fiscal policy” under the Trump presidency but that the FOMC itself was “operating under a cloud of uncertainty” about what will actually be delivered.
Heading for normality
Since the GFC, low rates have created asset bubbles in the property and share markets, sparked a round of competitive currency devaluations, clobbered savers, and exacerbated inequality by rewarding speculators at the expense of everyone else.
The Fed is conscious of all those problems, and has given the strongest indication yet that it wants rates back at ‘normal’ levels as soon as reasonably possible.
That makes this rise a turning point – the beginning of a shake-out for a global financial system that has gorged itself on cheap credit for nearly a decade.