No more patience

Fed signals the end of crisis-fighting

After a two-day meeting, the United States Federal Reserve's policy-setting committee did the expected: it dropped the description of its monetary policy stance as "patient". This was in response, said Fed Chairperson Janet Yellen at a post-meeting conference, to increasingly positive economic conditions. While it was still considered unlikely that the economy would look good enough by the April meeting of the Federal Open Market Committee for rates to be raised, an increase "could be warranted at any later meeting depending on how the economy evolves". Prof Yellen was insistent that the FOMC had not decided when rates would go up - though did not rule out the possibility that they may increase as early as the committee's June meeting.

This is more significant than it sounds. In essence, the US Fed - by far the most influential international economic actor in recent years - has declared that the final end of the United States' various post-crisis measures is in sight. The Fed has tried three bouts of unconventional stimulus - the bond-buying programmes known as "quantitative expansion" or QE - and has maintained ultra-low interest rates. This broad spectrum of treatment for a listless economy has been replicated across much of the developed world, including most recently by the much more conservative European Central Bank. But now the US economy is showing distinct signs of life. It isn't just that growth looks to have revived, with the US one of the few bright spots in the world economy. It is also that the growth revival appears broad-based, with non-farm employment growing in excess of what was expected last month. However, the Fed - judging by Prof Yellen's statements to the media - is still concerned about weak export growth, one reason for which may be a strong dollar. The flow of funds into the US that would follow an increase in interest rates would, of course, serve to strengthen the dollar - especially as the Fed is indicating a change of stance at a time when many big economic areas, including China, Japan and Europe, are loosening monetary policy. In other words, the US Fed is very conscious of the risks for the US economy of raising rates, and Prof Yellen's words - "Just because we removed the word patient from the statement doesn't mean we are going to be impatient" - needs to be seen in that light. Rather than just watching the jobs report, the FOMC is clearly now also watching the foreign-exchange markets.

The Fed, therefore, seems to have been read as being more dovish than expected, and that explains why several emerging-market currencies actually appreciated after the statement, instead of responding the way they did during the "taper tantrum" of mid-2013. In many ways, although Europe and Japan and China are still in the middle of their crisis-fighting, the endgame of 2008 is finally upon the world. The question is this: will the US growth revival, and thus global growth, survive tighter monetary policy? The truth is that neither Janet Yellen, nor anyone else, knows for sure.