Why do I not believe the Fed?

So it got confirmed. The American Fed was giving away higher interest rates again after a year. So the main financial puzzle of the year 2016 got solved. And the puzzle was the timing of the raising of the interest rates in the USA. While a year ago, the interest rates in the USA rose during December from the 0 – 0.25 % zone to 0.25 – 0.50 % they are in the zone of 0.50 – 0.75 % now. This wasn’t anything unexpected for the market. It’s almost like when you can tell that you get socks once again under the Christmas tree just by the shape of the wrapping paper.

The rub lies in the unexpectedly generous outlook of the American central bank. The Fed is not counting with raising the interest rates next year by 0.50 but right by 0.75 percentage point. Translated that would mean not two but right away three raising of the interest rates next year. The chief of the Fed J. Yellen hinted yesterday that the future fiscal expansions (or the spending of the government) will need a stricter monetary policy. But there are big question marks hanging in the air.

 

The detailed plans of the new president of the USA D. Trump for the fiscal politics are not known so far. So the changes in the fiscal politics can be hardly included in the outlook model of the American central bank. So far those are only speculations. But if we take on this feeling anyway then the inflation in the USA should rise.

Besides the pace of the inflation in the USA has reached 1.7 % year on year in November according to the today’s news which is one tenth of a percentage point higher than in October. So from the view of the inflation development, the Fed is really getting its hands untied for higher interest rates. Moreover, the American job market is not far from the state of full employment.

So why do I still not believe the new prognosis of the Fed about the triple raising of the interest rates in the year 2017?

Because if we relied on the prognosis of the Fed from past years then the interest rates in the USA should be floating around 3 % for a long time already and not under the level of 1 %. The Fed was promising even the quadruple raising of the interest rates in the USA for this year. In reality, only one snivelling raising of the interest rates happened and it did in last minute.

On top of that, it won’t be only about the development in the USA. The American Fed won’t be able to ignore that the Chinese growth is slowing down. And with the fast raising of the interest rates the developing markets would be collapsing. The capital will be vanishing thanks to the higher interest rates out of the USA exactly from them. And the Fed won’t find the support for the stricter politics in Europe either. And all of that is going to lead the Fed to carefulness which can be a devastation for the dollar.

The American currency will be continuing to appreciate for a while. That will be supported by bets on another growth of the interest rates in the USA coming up in a couple of months. Why couldn’t the dollar appreciate for a while to the parity with euro in the beginning of the next year? But then the dollar will be getting out of breath every time when the Fed decides not to push its rates higher. We could observe this story in the first half of this year after all.