Fed To Keep A Weather Eye On Global Economy

The Federal Reserve ended lengthy speculation about when it would start the process of normalizing interest rates in December 2015 when it increased its base rate by 0.25%. The move was supposed to be the first in a cycle across 2016 which should see the rate increase by 1% by year’s end. The original plan was that rates would inch up provided that job creation in the US economy remained robust, but the start to the year has seen a weakening oil price, tumbling stock values and a relatively strong Dollar compared to Sterling and the Euro as investors fret about a possible “Brexit”. The volatility; well, more accurately, downwards drift, of global stock markets has sent the Yen soaring against other major currencies as investors look to find a safe haven away from stocks.

The Federal Reserve does not act in a vacuum, of course, and has taken note of these global conditions with their ramifications for the US economy in what is, of course, a Presidential election year. Minutes released from its latest meeting, last month, note that uncertainty had increased since the December rise: “Members observed that if the recent tightening of global financial conditions was sustained, it could be a factor amplifying downside risks,”

Rates were left unchanged during the meeting and speculation has it that the March meeting of the Fed will adopt the same “steady as she goes” policy. In a speech to Congress, Ms Yellen noted that the US economy could be harmed by global conditions, implying that the impact of further interest rate increases would be weighed against the bigger picture and not simply the narrow concerns of the US economy alone. Any increase in US rates would tend to strengthen an already strong Dollar, creating difficulties for US exporters.