The long anticipated tightening of U.S. fiscal policy came to pass in the closing month of 2015 when Fed chair Janet Yellen announced an interest rate hike of 0.25% with gradual increases settling just shy of 4%. Markets reacted favourably to the news, viewing the announcement as a vote of confidence in the flagging US economy. Analysts supporting the move have even opined four further rate hikes over the year.
Not everyone is as optimistic though. While the decision to raise rates have been seen as a sign of economic recovery, other global economic trends paint a slightly different, and morose picture.
The second week of February saw global markets suffering a multi-day beating over concerns that the central banks’ optimism is misplaced. Worries over China’s slowdown, sinking oil prices and Bank of Japan’s decision to move interest rates to negative territory are in contrast against the Fed’s decision to hike up interest rates.
Japan’s move is seen as a desperate all-or-nothing gamble to jumpstart growth in a desperately weak Japanese economy by encouraging spending and incentivising banks to make loans. This tell-tale move by the BOJ is a strong sign Japanese growth may be far weaker than previously stated. It remains to be seen if such an unconventional measure will yield its intended effects or backfire into a market-led recession essentially weakening the Yen against the USD.
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