US rates lift off while Europe continues with easy money
As widely anticipated, in December the US Federal Reserve; often referred to as the Fed, announced an increase in the federal funds rate by 0.25 per cent to a range of 0.25 per cent – 0.50 per cent. This was the first rate increase in almost a decade and signalled the end of an extraordinary period of US monetary policy following the Global Financial Crisis.
The impact of the interest rate increase on share markets was slightly positive as investors were provided with some clarity after months of speculation regarding the timing of the Fed “lift off” and it also confirmed the Fed’s confidence in the improving fundamentals of the US economy. Economic data released during the quarter confirmed the continued strengthening of the world’s largest economy.
The Fed’s statement accompanying the rate rise implied that further increases to interest rates will be gradual and dependent on continuing evidence of US economic recovery. We believe that further interest rate increases are necessary in order to avoid deflation, reduce upwards pressure on asset prices (which could make conditions ripe for crash-type scenarios) and to enable the Fed to have sufficient fire power to stimulate the economy should the need arise. We envisage that US interest rates will be increased in a slow and measured manner and remain below ‘normal’ levels for some time to come.
The European Central Bank (ECB) continued its implementation of expansionary monetary policy in the quarter announcing a six-month extension to its quantitative easing program and cutting the deposit interest rate by a further 10bps to negative 0.30 per cent.