Business World

Thursday 27 October 2016

All eyes on the Fed with Yellen set to roll the dice

Published 14/12/2015 | 02:30

Janet Yellen, chair of the US Federal Reserve
Janet Yellen, chair of the US Federal Reserve

By this time of year the financial world is usually winding down.

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Most people who are desperate to clean up their books for year-end have done so, while the senior execs tend to float from Christmas lunch to client dinner and back again.

It's a bit unusual then, that this Wednesday will see arguably the most significant economic event of the year. That is the day the US Federal Reserve will announce whether it will increase interest rates for the first time in seven years, or not.

At this stage, it would be a surprise if the Fed left rates unchanged. After pulling back from a move in September, chairman Janet Yellen has dropped hint after hint that she will send rates higher in December.

On the face of it, it seems like the right thing to do. The US economy seems to be chugging along nicely, and unemployment is moving down steadily. With inflation very much under control it seems obvious to increase rates at this time.

But it's not as straightforward as that. Outside of the US things are not quite as rosy by any stretch. The European Central Bank is still in the thick of quantitative easing; Japan may or may not have fallen into recession in the third quarter of the year depending on who you ask; while China is in the grip of a downturn as well. China's issues in particular are causing a global commodities crash. Oil has stolen the headlines, but across the mining world prices for everything from iron ore to copper are plunging. As a result the junk bond market is in turmoil, with numerous debt issues in difficulty. A rate rise is seen as the last thing needed in that sector.

But Ms Yellen practically has to increase rates. By trailing a December move so heavily, if she doesn't move rates higher it will hurt her credibility with markets. Every central bank that has increased rates since the crash has had to reverse course later. Even after Wednesday, Ms Yellen may have an uncomfortable holiday.

Irish Independent

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