It’s seen as a hugely important step on the road to global economic recovery.
The Federal Reserve’s first interest rate rise since the financial crisis struck is designed to send a message that the US economy at least is getting back to normal.
The hike is extremely modest: rock bottom interest rates have been raised to between 0.25 and 0.5 percent. But the tightening of monetary policy is deeply symbolic, a sign that the economy’s prolonged period in intensive care is over.
“This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression,” Federal Reserve Chair Janet Yellen told a news conference shortly after the announcement.
What began as a banking crisis spread to all parts of the economy and all parts of the world. Easy credit and over-borrowing, an explosion of debt, lax controls especially on what a Senate report later described as “Wall Street excess”… it all boiled over.
The US subprime mortgage crisis saw rising defaults on bad loans spread panic throughout the banking sector. After the collapse of Lehman Brothers in September 2008, the whole financial system threatened to go bust. Central banks cut interest rates to near zero; massive bailouts saw billions pumped into banks to keep the wider economy afloat.
Seven hard years later, could the US economy which dragged the world to the edge of the financial abyss now lead it to safety? Euronews turned to Craig Erlam – Senior Market Analyst with the foreign exchange company Oanda – for analysis.
Alasdair Sandford, euronews:
“We’ve seen a fairly positive reaction by the markets so far – do you think that is set to continue?”
Craig Erlam, Senior Market Analyst, Oanda:
“I think so, I think the markets have welcomed the interest rate hike and the ‘dovish’ stance that came along with it – the need to raise rates gradually from here on in, so as to avoid further market turmoil, to avoid really choking off the recovery that we’ve seen so far in the US – and I think the markets are really giving their backing to what the Federal Reserve has done. There had to come a point at some stage (when) we were going to start discussing interest rate hikes – and with unemployment at five percent and job growth continuing and wage growth following in the future, I think this was a good time to start. It reassures the markets, and it removes that element of uncertainty which has really hung on the markets this year.”
“So much for the American economy, what will be the impact of the Fed’s rate hike in Europe do you think, and in particular the eurozone?”
“Well I think the eurozone is an attractive place to invest right now. I think it’s really turning a corner, and with the amount of stimulus that we’ve got coming from the ECB, and when we’ve got the Federal Reserve starting to tighten monetary policy, it becomes a far more attractive place to invest. US equities have benefited greatly from the Fed’s very stimulative programme, and now that that is starting to tighten monetary policy I think we could see a lot of cash start to flow into the euro area – and like I say it’s a fantastic time, just as the eurozone is starting to turn a corner. And all these issues with Greece, and Italy prior to that, and Spain prior to that, are starting to fade now.”
“Is the Fed’s move bad news do you think for emerging markets and the commodities?”
“I think emerging markets really priced in the Fed’s move. Back in August we saw that huge amount of turmoil which in my view actually prevented the Fed from raising interest rates a little bit earlier, in September. I think emerging markets really started to price this in. Now of course there are areas which are still going to be quite sensitive to what the US is doing, areas like Brazil where we’re already seeing quite a steep recession and there’s a lot of things like dollar-denominated debt and large current account deficits, fiscal deficits… so countries like this are going to remain a sensitive area when it comes to Fed interest rate hikes. But I think predominantly the emerging market world is quite well positioned at this stage to tolerate further interest rate hikes from the Fed, and I think we’ve seen this in the markets today – we’ve seen emerging markets as a whole rallying on the back of this Fed rate hike. And I think the reason for that is the removal of the uncertainty that I alluded to earlier.”
“Now the US was seen to be at the origin of the financial crisis a few years ago. Is it now beginning to lead the world towards recovery would you say?”
“I think the US – yes it was really at the origin of the financial crisis, but it was also one of the first nations to really deal with it, with all these foreclosures etc, and while there was a lot of harm done to the economy at the time they were also the first real country to take the fight to the financial crisis and try and find a way through it. And now we are seeing the benefits of that: they’ve had a lot of pain in the initial stages, but now we are starting to see the benefits of the actions that they took back then. Now other countries are a little further behind: the UK may be about six months behind with the first interest rate hike, the euro area may be a couple of years behind, but I think a strong US economy is good for the global economy. It’s the world’s largest economy and therefore if the US is performing well then it benefits everyone.”