A Good Rate Hike for Europe

Ready for a US Rate Hike?

At the ECB press conference in early July, Trichet signaled at least one more rate hike either in September or October. Some Council members are known to support two more rate hikes before year end.

Though the Fed has now decided to keep its policy rate unchanged, it also stated that a rate hike is still on the table for 2015. The concern is that countries that are dependent on foreign financing could be hit by sudden outflows of international capital, or that currency depreciation following the Fed hike could raise debt servicing costs for countries and businesses.

In an anonymous leak to a major financial news service, an ECB official falsely maintained that unanimity was needed for a rate hike, implying a single dove could stop it. Infuriated by what he considered to be guerilla tactics, Trichet effectively silenced the mischief makers by the bold stroke of pre announcing the rate hike two weeks before the meeting.

First, the divergence of monetary policies between the US and other major economies is already universally understood and expected. Thus, the interest rate differential, like the US rate hike itself, should already be priced into currency values.

Indeed, even the markets were fooled, giving the ECB a good grade for its unremarkable rate hike. Inflationary expectations, as measured by the rates on certain market instruments, actually fell after the hike, indicating increased confidence that the ECB will keep a lid on price pressures.

Even the doves might support a rate hike in September to counter act the charge that they are being bullied out of a September hike by Sarkozy. There is no doubt that Sarkozy s attacks on the ECB are having a counter productive effect in this regard.

The Fed of course understands that pretty much everyone dislikes interest rate hikes and almost always likes rate cuts. Any central banker will tell you that he or she gets 99 requests for interest rate cuts for every request for a hike, almost regardless of the situation.

Looking at the monetary tightening that began in February 1994 and June 2004, the dollar strengthened substantially in both cases before the first rate hike, but then weakened by around 8 (as gauged by the Fed s dollar index) in the subsequent six months. Over the next 2 3 years, the dollar index remained consistently below its level on the day of the first rate hike.

However, late last year, Everbright Bank and some others began offering fixed rate mortgages. Take up has been slow, but the April 2006 surprise hike in bank rates may help to sow greater public awareness of interest rate risk.

Japan s Tax Hike Test

But such an insignificant rate hike will do little to relieve long term pressures, because investors will expect more rate hikes and move money into China, increasing upward pressure on the yuan s exchange rate. Indeed, the logic is self fulfilling as more foreign currency flows into the market, the economy will continue to overheat, necessitating further interest rate hikes.

While the Fed s rate hike, prudently accompanied by an emphasis on small and gradual steps, may not turn out to be a trigger, the concerns about the knock on effects are legitimate. It would be unwise to assume that, with the initial hike now behind us, systemic risk has somehow disappeared.

We should cancel the hike.

The day after Black Monday, Minister of Economy Alexey Ulyukaev said that the CBR should have increased interest rates sooner. This immediately raised suspicion that the CBR delayed the interest rate hike in order to complete the deal at the lower rate.

In an interview with Frankfurter Allgemeine Zeitung, for example, Bundesbank president Axel Weber made it clear that future rate hikes were very much on the table. Others spoke out as well, and the futures markets quickly predicted another 25 basis point rate hike in March.

Duisenberg recognized this linkage and held firm. The ECB s paltry rate hike in December, together with the supine promise of no plans for further monetary tightening, demonstrates that Trichet is no Duisenberg.

You hike around, you see something like this.

It has been more than successful at the second, partly because it has been less than successful at the first. So why will policymakers be considering an interest rate hike at the Fed s September meeting?

TOKYO Last April, Japan s government implemented a long planned consumption tax hike, from 5 to 8 , the first in a two step increase that is expected to bring the rate to 10 by 2015. The hike a key feature of Abenomics, Prime Minister Shinzo Abe s three pronged strategy to revive Japan s economy signals the government s long term commitment to fiscal consolidation.

It's kind of out past Mars. It's a hike.

You can hike for days and not encounter anybody.

Jeffrey Frankel, for example, recommends a pre announced plan to increase the tax rate by, say, one percentage point annually for five years. But Japanese policymakers, media, and academics largely continue to favor a sudden and substantial hike.

BOLOGNA After a 30 year hiatus, international coordination of macroeconomic policy seems to be back on policymakers agendas. The reason is understandable growth remains anemic in most countries, and many fear the US Federal Reserve s impending interest rate hike.

This threat took a heavy toll on the ECB s credibility, since an interest rate hike in the midst of the most serious financial crisis in decades was obviously absurd. No one believed it, and the ECB not only withdrew its clumsy threat the next month, but it adopted a policy of interest rate neutrality.

But even he might find it daunting to reconcile the conflicting demands of the ECB to accelerate the interest rate normalization process and those of the French political establishment to maintain the status quo. But the recent good economic numbers coming out of France should make an October rate hike easier for French politicians to accept.

On December 28, Kweichow Moutai announced that upon study, it has decided to appropriately hike the price of Moutai liquor products in 2018 on average, the magnitude of the hike would be approximately 18 .

But he was told he couldn't go on the hike this year because one of the students in the class was disabled, so the other 25 students didn't get to go on the hike either.

The reason we should fear this possibility is that the world s economic equilibrium is both fragile and unstable and could wobble dangerously without determined and coordinated policy intervention. A Fed rate hike might not tip it over, but some other seemingly innocuous event could.

Unlike the taper tantrum and the devaluation of the renminbi, the Fed s rate hike announcement on December 16 certainly was no surprise. So one might argue that if the Fed s move does lead to volatility in international capital flows, the process must have already started.

The Fed should regard lower commodity prices, reduced inflationary pressures, changes in the labor market, and further disruptive technological shifts as sufficiently convincing arguments to postpone a rate hike. Including the risk of excessive volatility in the global financial system tips the balance even further.

Now, to find dinosaurs, you hike around in horrible conditions looking for a dinosaur.

Yet widespread concerns persist. The International Monetary Fund for example, has argued that any rate hike by the Fed would need an effective monetary policy communication strategy a polite way of saying that any monetary tightening in the US and other advanced economies would be premature.

Of course, the second quarter GDP data show the economy s immediate response to the hike. But no decision should be made until the third quarter results are released, providing a clearer picture of what will happen to Japan s economy after it absorbs the first rate increase.

Although the meager rate hike was presented as a consensus of the ECB s Governing Council, it soon became apparent that the decision had been controversial. Some Council members, unhappy with Trichet s dovish stance at the December press conference, made their displeasure known via the press soon after.

And yet, while the consumption tax increase is not ideally timed, I am not entirely pessimistic about its impact. The Mundell Fleming framework which describes the short run relationship between the nominal exchange rate, interest rates, and output in an open economy indicates that, under Japan s flexible exchange rate regime, the post hike decline in demand could be addressed relatively easily with more expansionary monetary policy.

Without a strategy for growth, an effort to reduce government spending, and a policy to stop deflation, a tax hike will not solve the problem. Indeed, some economists fear that a fiscal crisis could erupt even aftera tax hike is passed.

So, you hike around and this is after you dig them up, they look like this.

Or is that a three hour hike, or is that a whole day I'm looking at?

Expectations of a rate hike have restricted flows to emerging markets ever since 2013, when the Fed triggered what came to be called the taper tantrum by announcing that it was likely to reduce its bond buying program. The resulting alarm roiled US financial markets and spilled over internationally.

Another reason why the Fed should postpone a rate hike is that financial turmoil in emerging markets, particularly China, could have a substantial impact on the global economy, with some clear implications for the US economy. In particular, lower energy and commodity prices are likely to dampen inflationary pressure.

This price hike caused Kweichow Moutai shares to soar. A Beijing Morning Post reporter calculated and found that Kweichow Moutai s share price had increased by RMB95, or more than 14 , over the eight trading days since the company announced its price hike.

The political costs for the ECB of making this type of mistake could be exorbitant. This is why the ECB must be very prudent as it considers whether to maintain the current pace of rate hikes, in which case it would raise rates by 25 basis points in September, or slow the pace down a bit, in which case the next rate hike would come in October at the earliest.

America s monetary policy reveals another layer of codependency. By citing international concerns especially China s slowing growth as a major reason for deferring its long awaited interest rate hike in September, the Federal Reserve has left little doubt concerning the key role that China plays in sustaining a still fragile US recovery.