Global rates are finally turning
18 June 2015
Since the GFC, the cost of capital -- interest rates -- has collapsed across the developed world. In Europe, Japan, and the US it is, to all intents and purposes, zero. Japan seems unlikely to get out of its 25 year hole any time soon, and Europe is continuing to struggle. That leaves America, whose economy is stuttering slowly back into life.
That is why signs that it will establish an interest rate are of great signfiicance for global markets. The AFR is suggesting the change is approaching:
"The Fed is setting us up for the rate hike, which is inevitable and will come sometime between now and December," said Wayne Kaufman, chief market analyst at Phoenix Financial Services in New York. "I haven't figured out whether the rate hike will be in September or December, but I think September is more likely, and I would prefer to get it out of the way.
"Bonds had a muted reaction to the news, and stocks don't seem to be having much reaction either. People have been expecting a rate hike to come, and the market is ready for that. At the same time, we're also still worried about Greece," Kaufman said.
Fed policymakers maintained the current near-zero rate for now and said a hike would only be appropriate after further improvement in the labour market and greater confidence that inflation would rise.
"Economic activity has been expanding moderately," the Fed said in its policy statement following a two-day meeting. "The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labour market indicators suggests that underutilisation of labour resources diminished somewhat."
It is not certain. America is still only slowly recovering:
"In their projections, Fed officials lowered expectations for GDP growth in 2015 after accounting for a weak start to the year. It was the second time since December that the central bank has downgraded its GDP forecast for this year.
In March, Fed policymakers had projected the economy to grow between 2.3 per cent and 2.7 per cent this year.
But 15 of 17 Fed policymakers still indicated the first rate hike should take place this year, no change from their previous set of predictions."
The American interest rate has a determining effect on investment returns, because it is one of the things that sets the floor above which other, more risky investments must provide. It could represent a crucial turning point in the global markets.