Thursday 20 October 2016

We should welcome US interest rate increase

Published 17/12/2015 | 02:30

Janet Yellen, chair of the US Federal Reserve. Photo: Andrew Harrer/Bloomberg
Janet Yellen, chair of the US Federal Reserve. Photo: Andrew Harrer/Bloomberg

One may be free to choose but not free from the consequences of the choice; yesterday, US Federal Reserve chairperson Janet Yellen made her choice.

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It's seldom that a single decision can have such impact on so many. But as Ms Yellen explained, the interest rate increase she announced marks the end of an extraordinary seven-year period. In this time, the world has weathered the worst financial crisis and recession since the Great Depression.

After such a prolonged period of rock-bottom US interest rates, as well as three rounds of quantitative easing, it is finally believed that the US economy is sufficiently back on track to make the move. Employment levels have improved, even if they are not back at pre-crash levels.

For some time now, key policymakers have been anticipating such an increase. Given the strong growth in the US economy, complemented by the steady drop in unemployment, the measure was quite justified. The unprecedented lows have come with their own risks. And the fear of a credit bubble was real enough. By moving now, when the market has been braced, the prospect of being forced into a series of jolting sudden rises next year has been kept in check.

From this side of the Atlantic, a strong US dollar also has a considerable upside. But on the factory floor in America, a fall in overseas demand was registered due to the dollar's strength. The dollar hit its highest level since 2002 this year. It has risen by 10pc and this rise will keep it in demand.

But the consensus is that the American economy is robust enough to carry higher borrowing costs. In any event, Ms Yellen has been hinting at a hike for so long that had she faltered it would have raised new doubts about the financial security of the US. A resurgent dollar inevitably produces a weaker euro. Obviously, a weaker currency makes our imports more expensive, but the flipside is it makes our exports cheaper.

Given our strong economic ties with the US, Irish exporters are better placed than most of our neighbours in the single currency area to gain advantage from a falling euro.

Irish Independent

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