After an agonizingly long hesitation, America’s central bank is finally making up its mind on increasing interest rates. This is a sign of strength – and a reason for hope for Europe as well.
Seldom has an interest rate reduction been established for a protracted period of time. For more than a year, there has been speculation over the U.S.’s retreat from a zero-interest-rate policy, but the Federal Reserve has always found valid — and less valid — reasons to stall on the rate hike. The time is finally here. America’s monetary authorities have unanimously decided on the first prime interest rate increase in nearly a decade. In light of virtual full employment, sound economic growth and expected intermediate-term inflation within the target range, the prelude to a normalization of monetary policy is coming rather late – but better late than never.
The date of Dec. 16, 2015 will undoubtedly be mentioned in future books on the financial crisis as the beginning of the end of a gigantic experiment. However, one should not overestimate this turning point. The U.S. is still using an ultra-expansive monetary policy. The hope for normalization of monetary coordinates still remains in the distant future. In this light, Federal Reserve Board Chair Janet Yellen indicated that further interest rate increases would occur only with caution and in accordance with supporting economic data. The key word is gradualism. Hastily returning interest rates to a pre-crisis level is not to be expected.
Yellen’s restraint has its reasons. Indeed, it would be in the interest of all large central banks if the key interest rates once again were raised significantly from the zero limit, as only with clear, positive rates will the monetary authorities reconquer interest rate policy leeway to be able to deal with future disruptions effectively. However, central banks are facing a dilemma. No one wants to audition higher rates, as it usually attracts international capital, which strengthens the domestic currency but could stifle economic recovery. Thus, everyone is waiting calmly and hoping that someone else makes the first move.
The fact that the Fed is at least making a small move is right and important for two reasons. First, the dollar, as a key global and anchor currency, is taking on a current leading role, whether we like it or not. Second, the Fed, with the much too free monetary policy in the years under Alan Greenspan, was, in no small way, the trigger of the financial crisis in 2007. The resulting policy of quantitative easing that was put into practice virtually forced a zero-interest-rate policy on the rest of the world as well, as a threatening revaluation of domestic currencies would have otherwise occurred. The fact that the U.S. is the first to take aim at a way out is a strong sign.
For the eurozone and Switzerland, the interest rate policy turnaround is good news. If the dollar, with the increase in interest rates, becomes more attractive for investors and even gains value, this will take pressure off both the euro and the overvalued franc. For a foreseeable period, this will still not result in the central banks of Europe or Switzerland following suit in regard to interest rate policies. Nonetheless, the need to more aggressively ease monetary policy will be reduced, at least, which in times of permanent states of emergency, is still something.