Will the Fed reverse its rate rise?

published 5 February 2016

Before the Bank of Japan's surprise bazooka cheered markets up this week, everyone was concentrating on the US Federal Reserve's latest report and a poor fourth quarter for the US economy. Growth slowed to an annualised 0.7% between October and December, down from 2% in the previous quarter.

Markets now don't expect the Fed to raise rates again until September. Only four weeks ago the next hike was pencilled in for March. Given the jitters over China, tanking oil and a weakening American economy, there have even been "near hysterical calls" for the Fed to reverse December's hike to 0.5%, says Jeremy Warner in The Daily Telegraph.

It's absurd. How can a quarter point increase in rates make the difference between a recovering economy and one that slumps back into recession? "Every time the markets sneeze, central banks are expected to step in with the resuscitator. If economies are ever to get back to normality, it is vital they stop this nonsense."

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In any case, investors seem overly pessimistic. US growth should strengthen given the robust labour market, buoyant consumer confidence, and a dwindling drag on the numbers from declining investment in the mining sector, says Capital Economics. And the panic over plummeting oil is just silly, adds Jonathan Allum of Nikki SMBC Capital Markets. There are more oil consumers than producers, so it can only have a beneficial effect on the world economy, short-term jitters notwithstanding. This is not 2008 all over again.

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.