A rise in US interest rates may be justified by conditions in the domestic economy, but it could have profoundly destructive consequences for many emerging market economies
Decision time approaches for the US Federal Reserve. It’s been a long time coming. Yet for all the months of anticipation, and the acres of column inches the decision has already attracted, it will be no less momentous an event when it eventually does. If the Open Market’s Committee takes the plunge, it will be the first US rate hike in nearly 10 years.
For much of this time, rates have remained close to zero. Admittedly, a rise of just 0.25 percentage points would, to most people, seem neither here nor there. Yet it would at least be a start, a first baby step on the long march back to interest rate normalisation – if not the relatively high real rates of interest we had before the crisis. Few think global demand will allow for this latter prospect for a long time to come.
You can argue it both ways. But with unemployment down to little more than 5pc, and judging by recent growth in the money supply and continued economic growth now hard-baked into the system, the case for action is a relatively strong one. In my view the Fed has already left it too long. True, headline inflation remains very subdued, but it gives a somewhat misleading impression. Low prices are mainly an energy and commodity-based story. Core inflation, excluding these variable items, has been hitting rates of 1.8pc for nearly a year now.
In any case, in itself a rate hike of such a limited order of magnitude is unlikely to do much harm to the US economy, and on the stitch in time principle, it makes some sense to start now. Leave it too late, and there is a danger of having to play catch up, with much more damaging consequences for consumer spending and business confidence down the line.
Yet unfortunately for the Fed’s Open Markets Committee, it is not just the impact on their own economy that they have to worry about. The dollar’s dominant reserve currency status makes this a defining moment for the global economy as a whole. If Committee members bury their heads in the sand, and treat it as solely a domestic matter, the decision may come back to bite them on the ankles.