“The stocks were sold; the Press was squared/ The Middle Class was quite prepared.” What Hilaire Belloc wrote of Lord Lundy applies double to Janet Yellen. With excellent reason. With the crybaby aristo, all that effort was spent on his career in politics; Ms Yellen, on the other hand, is doing something far more important. The head of the US central bank is busy preparing America, its new president, and indeed the world, for rising interest rates – and for a new economic era. The story of US interest rates this decade is simple to the point of tedium. The key fed funds rate has been dragging along just above zero ever since the banking crash. In December 2015, it was nudged up by a quarter of a percentage point by Ms Yellen and her colleagues at the Federal Reserve. A whole year later, they nudged it up again, which means that seven years after the notional end of the US recession it stands at mere 0.75%.
That is set to change. Over the past few weeks, rate setters at the Fed have dropped broader and broader hints that interest rates will go up as soon as next Wednesday – and will keep going up. Last Friday was the turn of Ms Yellen. Speaking in Chicago, she said: “We currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect.” That is about as straightforward as you get in central-bank speak. Nor is that likely to be the end of the rises: according to the Fed’s charts, committee members now forecast three interest-rate rises this year alone, and more in 2018. There are geopolitical reasons to hold off making too early a move. Next month, France’s presidential election, in which rightwing, anti-euro candidate Marine Le Pen is leading the polls, kicks off. Last year, the Fed held off in June before the Brexit vote.
While the timing is still moot, there are few betting that rates won’t rise. Considering this, three observations can be made. First, even while all this briefing has been going on, US asset markets have remained remarkably buoyant. That is very different from the nerves exhibited by investors in US Treasury bonds in 2013, when Ms Yellen’s predecessor, Ben Bernanke, dared to suggest he might turn off the tap marked “easy money”. Even with a much more volatile figure in the White House, financial markets seem far more confident on the prospects for the US.
Second, by raising rates now the Fed is giving itself vital room for manoeuvre ahead of the next downturn. The old rule of thumb is that recessions come around every seven years – which would mean, going by the National Bureau of Economic Research, that the next bust is not far away. The Fed is in a far better position than the Bank of England, whose benchmark rate is at 0.25%. Mark Carney and the Bank have been obliged to keep rates so low in order to stimulate the economy while the government cuts spending year after year. Far from an accident, this is official policy, summed up by former chancellor George Osborne as “tight fiscal policy and loose monetary policy”.
There’s a lot wrong with this state of affairs. It puts an unelected official, Mr Carney, in charge of the UK’s medium-term growth strategy and leads to a highly regressive system where the rich see their house and other assets soar in price. And, in the event of a plunge or crash or Brexit-related turbulence, it leaves the Bank of England with nowhere to go.
Finally, a world economy in which the US is pushing up rates while the UK is keeping its rates at rock bottom means one thing: the pound remaining low and import prices going up. Global investors want to stow their cash where they can get higher returns. For the foreseeable future, that will mean dollar-denominated assets over those priced in sterling. Which ultimately means that those in Britain who are “just about managing” will struggle to manage. Whatever their rhetorical concern for the Jams, Theresa May and Philip Hammond are following an economic policy that does nothing to help them.