A December liftoff for US interest rates is looking increasingly likely after Fed officials showed support for such a move during their last meeting in October.
In the weeks after the meeting, US stocks have surprisingly surged as the market responded positively.
The Dow Jones Industrial Average recorded the biggest single-day spike in a month on Wednesday.
The VIX index, which measures investor anxiety, fell 11 percent.
Why was the response different from two months ago?
Firstly, since the Federal Reserve wound up quantitative easing at the end of last year, a US rate hike has been a question of when, not if.
Delays of the anticipated move have somehow undermined the Fed’s reputation.
A decision to lift interest rates in December could help the Fed save face.
Secondly, some uncertainty has been removed from the market.
Analysts believe the US economy now has stronger fundamentals and does not need a crutch from low interest rates.
A normal interest rate level will benefit the market.
Thirdly, a rate hike, which would be the first in more than six years, is likely to be moderate, given that inflation remains slow, corporate profitability is weak and next year is an election year in the US.
There’s only a 30 percent chance that the Fed will increase interest rates by more than 75 basis points by the end of next year.
A moderate rate hike is good news for the US.
However, whether it is also good news for commodities exporters and emerging economies is hard to tell.
The US exchange rate is key.
A mild rate hike does not mean a slower dollar appreciation.
The US dollar exchange rate will depend on whether central banks in Japan and Europe will expand their quantitative easing and on the global economic environment.
If the Fed decides to increase interest rates next month, the greenback will stay strong for quite awhile.
But whether there will be more rate hikes will depend on a whole lot of outside factors, not merely those deemed critical by the Fed.
This article appeared in the Hong Kong Economic Journal on Nov. 20.
Translation by Myssie You
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