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Business Insight

Zero-Interest Rate Era Ends

US central bank officials have embraced a policy shift that will increase the burden on Americans and likely impact emerging markets.

They've raised the key interest rate for the first time since the financial crisis, a decision that will lead to higher loan repayments and potentially cause a shift of assets back to the US.

Federal Reserve policymakers raised the range for the Federal Funds rate from near-zero to between 0.25 and 0.5 percent.

They said the labor market has made big strides this year, and economic activity has been expanding at a moderate pace. Fed Chair Janet Yellen stressed the central bank will continue to keep a close eye on the economy. Federal Reserve Chair Janet Yellen said "with the economy performing well, and expected to continue to do so, the committee judged that a modest increase in the federal funds rate target is now appropriate, recognizing that even after this increase, monetary policy remains accommodative."

Cutting the benchmark interest rate to near zero in the first place was a last-ditch measure. Policymakers were desperate to stop the financial crisis from dragging the economy into depression.

In September 2008, the biggest bankruptcy in US history rocked global financial markets. Then Federal Reserve chairman Ben Bernanke said "the financial systems in United States and much of the rest of the world are under extraordinary stress particularly the credit and the money markets."

Fed officials took unprecedented measures to prevent the country from sinking into a full-blown depression. Up until that point they'd already been cutting interest rates in stages. They'd been trying to combat the effects of an economic slowdown brought on by the subprime mortgage crisis.

Then, in December, they lowered the rate to near zero for the first time in Fed history. And they bought buying mortgage-backed securities and long-term government bonds to pump liquidity into the markets.

Fed officials spent trillions of dollars before finally putting an end to their asset buying program last October. They'd seen some encouraging signs that an economic recovery was taking shape.

Since then, investors around the world have been watching and wondering when the Fed will raise the key rate. In March, Fed Chair Janet Yellen hinted that the bank would consider it once it's confident of the recovery in the labor market and prices. Then in summer, global stock prices plunged due to concerns over China's economic slowdown. At meetings in September and October, Fed officials decided to keep the rate unchanged.

Meanwhile, the US economy continued to get stronger. In November, the number of nonfarm jobs increased by 211,000 from the previous month, exceeding market expectations. Earlier this month Janet Yellen affirmed that the economy was showing signs of steady growth.

Seven years after putting this extraordinary measure in place, Fed officials reached a milestone moment.

NHK WORLD economics correspondent Reiko Sakurai joined Ai Uchida in the studio. Uchida: Policymakers have finally made up their mind to take a step forward. Why now?

Sakurai: They've certainly decided that the time is ripe. The jobless rate is at 5 percent, half of what it used to be during the peak of the global financial crisis, and just about the same level it was before the crisis occurred. Consumer spending and residential investment seem to be holding steady. And stock prices have increased in recent years, pushing up the net worth of households. A factor that might have been weighing on Fed officials' minds was the risk to the global economy. America's major trading partner, China, has been slowing down. And the economy in Europe is still shaky. But then, raising rates now would give the Fed a free hand, if economies worsen. Janet Yellen has also been very, very careful to avoid a shock to the markets. And she's taken sufficient time, months, to be precise, to let market participants know that the Fed actually wants to move ahead with a rate hike. After seven years of this near-zero interest rate policy, the Fed is now heading some way toward normalization.

Uchida: And since the Fed's decision hasn't been a big surprise, what will come next?

Sakurai: Policymakers signaled that they would hike rates four times in 2016. They stressed that future increases will be slow, with gradual adjustments expected to help the economy. Business investment and wages are not as strong as policymakers had hoped. Inflation is still below their 2 percent target...largely due to low oil prices. And the dollar has climbed to a 12 year-high, possibly adding to the burden on already weak exports. Given the risk to the global economy, policymakers probably won't be in a rush to make big changes.

Uchida: Speaking of the global economy, what are the wider implications of the Fed's decision? Sakurai: The prospect of a rate hike has been on the table for months now, so many emerging countries have stockpiled foreign exchange reserves to ensure they have enough liquidity. Yellen noted that while the Fed will monitor developments to avoid unnecessary negative spillovers, such as countries being badly affected by declining commodity prices, there are brighter spots to watch for.

Uchida: Many emerging economies are not doing as well as they used to. Oil prices are significantly lower than before, hitting oil-producing countries. China is growing more slowly and importing less, and that's taken a toll on economies that export to the world's most populous nation.

Sakurai: The effects from the decision to end a 7-year campaign of global monetary easing have yet to be known. So Fed officials have every reason to be cautious, and ensure that the global economy stays on a steady path.

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