Asian Stocks up Strongly as Fed Rate Hike Looms

Ultimately, how hot to run the US economy comes down to a judgment about what’s important. It may not take so long to know whether its decision was correct.

German economic confidence improved to a five-month high in December as investors expect the asset purchase program of the European Central Bank to boost recovery, the survey carried out by the Mannheim-based Centre for European Economic Research, or ZEW showed Tuesday. Mr Rajan expects a 25 bps hike by the US Fed. Fed Chair Janet Yellen has suggested many times that when the data show the economy is strong enough to handle more expensive loans, the Fed will nudge rates up. But how well the Fed engages in messaging will greatly determine the smoothness of that path for the market, which has stumbled before in predicting the timing of a rate hike, as well as the pace of successive future hikes.

Look, the Fed has standards, too.

“The economy is not that close to normal yet”, Levin says.

Fed policymakers saw higher inflation around the corner in 2013 and 2014 that did not materialise.

The unemployment rate remained low at 5 percent for a second straight month, and average hourly wages were up 2.3 percent from 12 months earlier.

In a client note last week, Morgan Stanley’s Ellen Zentner said it would be a mistake for the Fed to leave markets’ expectations for gradualism right where they are.

The turn toward higher rates has been months in the making. The policy was brought in after a mortgage-backed financial bubble exploded and triggered a global financial meltdown.

Since the Fed has been flagging an imminent rate rise for much of this year, the increase itself should not have much impact.

“An abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession”, she said. “A marginal 25 bps rate hike in overnight Federal funds is imminent and in all likelihood, the decision to do so could be taken in the review meet”.

In 1936-37, the Fed sought to normalize its policies by increasing the amount of money banks had to hold as reserves.

Bank Negara will face tough choices following the FOMC’s decision. The economy fell back into a brutal recession in which around 2.5 million Americans lost jobs. President Rosengren, a dove, will round out the new voters for 2016. And the Fed rescinded the increased reserve requirement.

Ben Bernanke, the Fed chairman during the 2008 crisis, was a keen student of Japan’s experience after the bursting of a stock and housing bubble in 1990. “How soon?” is the million dollar question, but even the rate-hike-eager analysts don’t see the Bank of England moving until May next year at the very earliest, with interest rate futures – a barometer for underling rate expectations – not pricing in a hike until 2017. The Labor Department said its consumer price index was unchanged in November after rising by 0.2 percent in October.

When the 2013 currency crisis unfolded, the country’s foreign exchange reserves were about $ 274 billion, sufficient to cover six to seven months of imports, as compared to eight to ten months, seen as a necessary condition for currency stability.

Japan’s experience reflects the risks of raising rates when inflation is negligible, as it now is in the United States. It’s a sharp policy reversal.

“Ultimately, if we get to 1 percent or so, the effect will be positive on the economy”, DeShurko said. The bank, then led by Jean-Claude Trichet, said it needed to reduce inflation pressures in the eurozone.

Today’s anticipated hike will be “like the first dusting of snow, signaling a change in the season”, said Greg McBride, chief financial analyst at Bankrate.com.