Editorial: Fed decision confirms interest rates are on the turn

The Federal Reserve chairwoman, Janet Yellen. Photo / Bloomberg

Editorial

The end of an economic era may have occurred yesterday. The rise in interest rates announced by the US Federal Reserve Board looks like the turning point from the cheap money flooding through Western economies since the global financial crisis, to conditions more normal.

That means interest rates reaching levels allowing economies to grow without unleashing inflation. But it also means households carrying very high mortgages from the property boom generated largely by cheap money, will find interest rates rising in the new year.

The announcement by the Fed chairwoman, Janet Yellen, yesterday was significant not so much for its immediate rate increase as for her indication that three more rises in the US base rate can be expected during 2017. Markets had been expecting two at most. The change can be attributed directly to the response on US currency and stockmarkets to the election of Donald Trump.

The markets clearly believe Trump's promises to cut taxes and increase spending on infrastructure will give a hefty stimulus to the US economy next year, which does not really need it.

The economy has been recovering steadily in the two years since the Fed stopped "quantitative easing" and has seen an expansion of jobs this year.

The Fed was sufficiently confident of the economy's health to make its first rate increase this time last year, but it held off making its expected further increases this year once it saw what was happening in the presidential election campaign.

Trump was winning the Republican primaries with rhetoric of protection and punitive measures against trade competitors and US companies that had production offshore. The implications of those sort of policies would be dire for US competitiveness in the long run and markets might price that damage into the currency quickly.

So the Fed put off a decision on further increases to December.

Yesterday's announcement means the Fed agrees with money markets that Trump's presidency, supported by a Republican-dominated Congress, is likely to produce a fiscal stimulant in the short term.

But since it comes on top of steady growth, the stimulus could also rekindle inflation, which the Fed has decided to forestall if it can, with rising interest rates.

Almost certainly the rising rates spell the end of the boom in property and stock prices worldwide.

Although the Reserve Bank of New Zealand lowered its official cash rate this month, and projected that historically low rate would last through next year, the lending banks in this country are already on a different course.

They say they are facing higher borrowing costs offshore and that trend is likely to continue.

Homeowners with high mortgages would be wise to fix their rates as soon as they can for as long as they can. Speculators who have gambled on rising prices may need to hedge their bets.

Estate agencies which think the Auckland market is in a temporary lull at the moment, may need to revise their predictions. Vendors who are holding back houses awaiting a market resurgence should wait no longer. Conditions have changed.