FED: MISSION IMPOSSIBLE

The intention of the United States’ central bank to raise the interest rate was unexpected and became a determinative capital market event in the last period. But will FED be able to increase the interest rate and if so, for how long?

The economic situation of developed countries seems quite ambivalent: first of all, because of emerging countries the manufacturing sector/industry is in recession or in a situation close to recession, while at the same time the service sector/domestic consumption is stable, which is not surprising, because the real wages are increasing both in Europe and in the USA. This duality was typical in the last months, there is nothing new. The only surprising movement is that in this environment the American central bank might increase the interest rate. Although the tightening American labor market makes logical the interest rate increase, the big question is: in a world, where the emerging markets are in recession or are slipping into recession and in developed markets there is no need for interest rate increase in the next 1-2 years, for how long can FED raise the rate? For how long will be the USA the only developed country, which gives interest, while all over the world the level of interest rates are low or negative? What will happen with the dollar if only they ensure yield?

I think that FED cannot really separate itself from global processes and if it starts to raise interests, then all of the world’s hot money will flow into the USA, which will strengthen the dollar to an unbearable level and push the American economy into recession. But if they won’t raise the interest rate, then it can easily happen, that inflation starts to go up slowly. In my opinion the second one is a way more tolerable scenario, especially if we take into account the large debt, which will be smoothly eroded through inflation (in real-terms).

In overall I think that FED may attempt to increases the interest rate, but it cannot go too far, because it would be a shoot in the foot for them.

So temporarily in developed economies the half-side growth and on the whole the low level of interest rate will remain.