The Fed gently introduces its monetary normalisation policy


By raising its key rate one quarter of a percentage point (from 0 - 0.25% to 0.25 - 0.50%), last night the US Federal Reserve brought an end to seven years of "zero" rate monetary policy. Analysis by Amine Tazi, financial macro economist in the Group's Economic Studies Department.

Although this hike was broadly anticipated by the markets, the main challenge for the Fed was to not cause any financial turbulence. The Fed successfully passed this test, against a backdrop that has nonetheless recently been turbulent (falling oil prices and increased volatility for example). With a statement that insisted in particular on the fact that any future rate increases would not only be gradual but also dependant on trends in activity and inflation, the markets reacted positively: equity indices rose and volatility fluctuations, the rise in bond yields and even the appreciation of the dollar remained limited.

Above all, we should see in this rate hike a reflection of the solidity of the US economy: the unemployment rate of 5% puts the economy at close to full employment and growth will be around 2.5% in 2015, in light of solid fundamentals and a continued positive outlook. This start of monetary policy normalisation is also a result of improved "integration" of external trends since September, when this initial rate hike began to be expected, but was ultimately postponed by the Fed due to the concerns surrounding the slowdown in China (and the emerging markets in general) and the resurgence of financial tensions.

Against this backdrop, the Fed's decision appears to be warranted, even though the associated risks (tightening of domestic monetary conditions, destabilising capital and foreign exchnage trends for emerging markets) continue to exist. Above all, from a long-term point of view, the Fed will gradually regain room to manoeuvre in order to combat a cyclical downturn in the coming years. To that end, it is worth reiterating that, six years after exiting the recession, US growth will start to decelerate.