When the Fed's Interest Rate Committee comes out of its final meeting on December 14, there is a very good chance that official interest rates in the US will rise by 25 basis points. After the holidays, the new monetary chief Jerome Powell will then move into the chairman's room.
Could the December rate hike, combined with the changing of the guard at the Fed, herald the start of a series of rate hikes? With all its consequences for the value of the dollar and the euro, but also for interest rates in the euro country.
Of course, anything is possible. But it's probably not. There is a good chance that the Fed's monetary course will hardly change under the new boss, compared to the course the bank has set for the coming years.
Small steps
As we have previously reported, the new Fed boss is in fact a male version of Janet Yellen, currently the bank's leader. It stands for a policy aimed at keeping interest rates as low as possible for as long as possible. And if interest rates do have to rise because the economic situation demands it, do so in small steps with fairly long pauses between 2 interest rate increases.
In addition, the Fed keeps a close eye on inflation developments in the United States (US). This is such that the risk of deflation has disappeared, but price increases, at less than 2% (on an annual basis), remain too low in the bank's view. A mini-series of very slow and cautious interest rate increases is much more appropriate than a volley of interest rate increases.
The Fed still maintains that it wants to raise interest rates 3 times next year. In my opinion, there is a good chance that these plans will not be implemented and that the counter will remain stuck at 2. But even if we assume the bank will raise its key interest rate 3 times, borrowing in the US will remain historically cheap.
In other words: the upcoming interest rate increase in December and the planned 3 increases in 2018 will not bring the official interest rate to a level where we can speak of a normal interest rate.
Abnormal remains the norm
Given the growth of the American economy and inflation, only an interest rate of 3% to 4% could be called somewhat normal. However, with 3 interest rate increases in the offing and 1 increase in December, the official interest rate in the US would be just above the 2% limit.
In short: monetary policy in the US was very loose, is very loose and will remain very loose for a long time to come; even after the planned interest rate increases and also under the bank's new boss.
In concrete terms, this means that nothing is expected from the monetary perspective that could put strong downward pressure on the EUR/USD exchange rate, or that would push up American interest rates. For the euro country, this means that long-term interest rates will remain historically low and that the ECB will not experience any pressure.