A walk through seven years of near-zero rates
The Fed liftoff is upon us, writes Jeanna Smialek
THE Federal Reserve is expected to raise interest rates exactly seven years after the US central bank cut them to almost zero in response to the deepest recession in the post-Second World War era.
As this unprecedented era of easy monetary policy closes, here is a walk through seven years at zero to highlight the obstacles policy makers navigated to restore labour-market health and enable liftoff.
1. Rates cut to zero, December 16, 2008. Fed officials lowered the federal funds rate into a 0% to 0.25% range as the US’s economic state deteriorated and the collapse of Lehman Brothers sent shockwaves through global markets. The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability”, officials said in their post-meeting statement.
2. Unemployment peaks, October 2009. The US haemorrhaged an average of 424,000 jobs a month in 2009, and by October, unemployment had reached 10%, its highest level since 1983. The broader underemployment index was even higher at 17.1%.
3. Easy the world over, 2010. Reverberations from the financial crisis were being felt around the world and central bankers were striving to mitigate the fallout. The Bank of England cut rates to 50 basis points in March 2009, where they have remained, having descended from 5.75% in 2007. The European Central Bank slashed its deposit facility rate to 25 basis points. The Bank of Japan cut interest rates for the first time in seven years in 2008. Monetary policy easing abroad aids the US by supporting global growth, but lower interest rates overseas can also encourage capital to flow into higher-yielding US assets, pushing up the dollar and hurting US exports by making them more expensive.
4. Debt-ceiling debacle, July 2011. Several times during the Fed’s expansionary era, fiscal policy has got in the way of recovery. Congress allowed the US to tiptoe to the brink of default on debt that it had already incurred by failing to agree on a higher borrowing cap. Congress ultimately came to a deal, but the spectacle shook confidence and Standard & Poor’s downgraded the US credit rating, dealing a blow to the stock market. Cuts to government spending that followed added to the economic headwinds.
5. Taper tantrum, mid-2013. Then-chairman Ben Bernanke testified to Congress that the Fed could start slowing the pace of its bond purchases later in the year, conditional on continuing good economic news. Markets went haywire at the prospect of less stimulus, with the yield on 10-year Treasury note shooting up as investors fled to safety.
6. Dollar ascends, mid-2014. The greenback, which has strengthened by about 21% since mid2014, has become a focal point for Fed officials as liftoff approaches. Weak growth and easy monetary policies abroad are pushing money into dollar-denominated debt, and when the US lifts rates that could intensify pressure on the currency to appreciate. Even if that risk does not stop the Fed from raising rates, currency strength will possibly cause policy makers to take their time in tightening. The dollar was one factor that “means that monetary policy for the US is more likely to follow a gradual path”, chairwoman Janet Yellen told a congressional committee on December 3.
7. Yuan devaluation, August. China allowed its currency to fall as its growth slackened, roiling global markets and inflicting considerable losses on domestic stock prices. The decision and its fallout was seen by many as the grounds for the Fed’s decision to delay liftoff in September.