by Chris Becker
On Friday morning, Australian time, we will see if the US Federal Reserve finally raises interest rates, reversing its extreme easing bias in place since the GFC. Futures are giving a probability of less than 30% as the doves – who favour holding – outweigh the hawks – who see the US economy in strong hands and ready for a confidence boost. The chicken littles and the occasional bear on the sideline are screaming versions of hold/just get on with it…
The question remains though, is the Fed making history or just repeating the actions – and mistakes – of various central banks around the world since the “Great Recession” who have begun a tightening program only to see it fail in the face of ongoing debt deflationary pressures.
This fantastic chart from the WSJ illustrates the problem facing the Fed, in practice:
In theory, the world moves according to the Fed beat, not that of the ECB, RBA or other central banks. If Mad Adam Carr’s thesis of higher interest rates = higher confidence = higher growth is borne out, then perhaps it could be a new era in monetary policy.
The likely course is one of destroying confidence by destroying currency value as emerging markets with currencies pegged to the USD enact the next stage of their low-growth problem – a current account crisis.