Breaking the ice on frozen rates has calmed markets, not roiled them
U.S. Federal Reserve chair Janet Yellen oozed confidence as she announced a hike in interest rates yesterday. Markets responded in kind. (Reuters)
With those words, U.S. Federal Reserve chair Janet Yellen meant to reassure ordinary Americans that yesterday’s quarter-point hike in interest rates, labelled “historic” after seven years near zero, was really nothing much to worry about.
With everyone from Harvard’s Larry Summers, to IMF boss Christine Lagarde to the Financial Times warning of the economic risk of raising rates, it appears that, so far at least, Yellen’s reassuring words were effective far beyond Main Street, extending to financial markets around the world.
If there are economists who think interest rates should stay at zero forever, I’ve never met them. So the issue was not whether rates should rise, but when.
With almost two years in the job as head of the world’s most powerful central bank, Yellen was able to present a calm and rational case for why the Fed did have to move now.
Calming effect
As some predicted earlier this year, the announcement of a rise in rates was far more soothing than the speculation and doomsaying that came before.
Challenged at yesterday’s news conference by a reporter who quipped central banks often kill off periods of economic growth by raising rates, Yellen had a confident response. She said the reason that sometimes happened was that central banks moved too late, allowing inflation to get out of control.
“At that point they’ve had to [raise interest rates] very abruptly and very substantially,” said Yellen. “And it has caused a downturn, and the downturn has served to lower inflation.”
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