2015 was dominated by declining oil, a rising dollar and an ongoing discussion of will she, won’t she, should she? She did. I’m speaking of Janet Yellen of course and rising interest rates.
Now that the uncertainty of Fed’s first move is past, we can move forward. Just where we are going remains to be seen.
Typically the Fed begins raising rates in response to a strong economy. The theory is that higher interest rates encourage more saving and less spending and borrowing. This slows the money supply and also economic growth and inflation. However, this time the Fed is starting with interest rates at 0%! Because there is no room for the Fed to move in the event of an economic crisis, they are forced to move rates off of 0%. This move doesn’t signal economic strength as much as it signals economic stability.
To use a medical analogy, the patient (Economy) is now out of ICU, but has not been released from the hospital by the doctor (the Fed) just yet. If the Fed continues to raise rates next year in response to stronger employment, manufacturing and corporate investment, the patient may indeed be released. Until then, the doctor will be checking in on a regular basis.
About the only source of comfort for our economy is “it could be worse”. Earlier in this article I said the Fed can’t go lower than 0%. Well, negative rates have been tried by the Japanese central bank, and most recently the ECB. We may be sick, but those economies are halfway to the morgue. The patient isn’t just in the ICU, the doctor is charging the hand paddles. Being in the hospital doesn’t seem so bad in comparison. Our patient will limp along much like a partially paralyzed patient trying to learn to walk again. It is a LONG SLOW process.
A side effect of higher interest rates is a stronger US dollar. Is a strong dollar good or bad for our economy? Yes. All economics are good for some people and bad for others. A strong dollar is great for consumers and travelers (using valuable dollars in exchange for Euro’s and Yuan), but not so good for US based multinationals trying to sell their goods (to buyers using cheaper Euro’s, Wan, and Yen) overseas. So go visit Europe, while it’s cheap!
Doug Lagerstrom