It is hard to think of a more talked about topic, in the financial world, than when the Federal Reserve will raise interest rates perhaps since the question of who shot JR in Dallas was on everybody’s lips, way back when. Like a good soap opera plot, the timing of the Fed’s first small rate hike towards traditional levels has been keenly debated for ages with everyone that went “short†looking silly. Most serious analysts have been expecting a rise ever since the end of the “Taper†when the Fed finally weaned the economy of its massive asset purchase programme in autumn of 2014. It was confidently predicted that rates would start their upwards trend before the end of 2014, with even the most cautious commentators seeing a rise in their tealeaves by the spring of this year.
US interest rates have been held at near zero since 2008, so the speculation about a rise has rumbled on for seven years now. They went to near zero in a bid to slash the cost of borrowing and encourage businesses to use “cheap†money to fund expansion and so boost economic growth. Of course, the initiative failed since business confidence was at a low ebb and there was little appetite for risk taking, but also because the banks had taken a beating in the crisis and were reluctant to lend whilst needing to rebuild their reserves to be in shape to handle a future crisis. The Fed has been reluctant to raise rates earlier since it was perceived that this could act as a brake on the recovery and forward guidance made it clear that a cautious approach would be adopted with no increases until unemployment was firmly trending down. Unemployment in the USA is about 5.5% of the workforce which is at the level previously identified as being where rate rises could be considered.
The Fed is remaining coy, noting that labour market and inflation conditions currently do not warrant a rate hike. However, Federal Reserve Chairman, Janet Yellen, said that “most [policy-makers] are anticipating a rate increase this yearâ€. Odds seem to favour between one and three (so err on the side of caution) rate hikes this year. If these do materialise, they may start as early as September, but will be gradual in scope, but as ever, the Fed is cautioning that any decision will be based on the prevailing economic conditions. So then, a definite maybe.
