Expect the Fed to take a hike this year

Six slow years and counting. That’s how long it’s been since the Federal Reserve has raised interest rates, maintaining a near-zero stance since 2008. Later today the Fed will release minutes from the December 16-17 meeting where they said they would be “patient” in determining if and when they will raise rates.

The minutes may provide some context behind the decision to use the language. In December, Fed Chair Janet Yellen said a raise would only come if there was data to support it. She added that conditions may warrant raising rates but there is “no preset time” for such action.

Daniel Franklin, Executive Editor at The Economist says we should expect a hike this year: “I think around mid-year. I think that’s going to be one of the main economic stories of 2015. Speculation as to when the move will come, how far and how fast it will go and who might follow. I expect the US to move first and the UK to follow.”

The Economist predicts the unemployment rate will drop in 2015 with wage and price pressure leading the Fed to raise rates. Franklin thinks the rate increase will be small but powerful enough to create volatility: “We’ve already seen how small adjustments or promises of adjustments can send ripples around the world. I think you’re going to see more of that.”

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Higher interest rates in the US will provide incentive for foreign investment. More money coming into America will spell trouble for emerging markets and countries carrying big debt. “You’re going to see nervous markets in currency. Perhaps even parity between the Dollar and Euro at some point in the year ahead. Probably in equity and bond markets as well,” says Franklin.

Franklin anticipates other central banks to move in the complete opposite direction: “The European Central Bank and the Bank of Japan are going to be piling on stimulus because they’ll be worried about recession and the dangers of deflation.” Italy could be the biggest concern as their debt accounts for a quarter of the Euro Zone’s bonds. Look for the ECB to use what happens in Japan as a guide for getting their own economies back on track.

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