The World Wary as US Federal Reserve Declares End to Debt Crisis

Central banks around the globe responded to the 2007–2008 global debt crisis by reducing interest rates and loosening monetary policy to encourage consumer spending, investment, employment, and price stability. After seven years the U.S. Federal Reserve lifted interest rates in December and signaled the possibility of gradual rate hikes, a move described by Chairwoman Janet Yellen as a process of “normalization.” Increased flexibility in short-term rates will make U.S. borrowing slightly more expensive and could increase some asset prices. The Federal Reserve anticipates that the rate hike is small enough so as not discourage consumer spending, though analysts express concern that emerging markets and the U.S. housing market may have become too dependent on the loose monetary policy, explains Chris Miller, associate director of the Grand Strategy Program at Yale. The Federal Reserve’s role is to stabilize the U.S. financial system, but the world watches every move.
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The World Wary as US Federal Reserve Declares End to Debt Crisis
Federal Reserve Bank Chair Janet Yellen at a news conference where she announced that the Fed would raise its benchmark interest rate for the first time since 2008, at the bank's Wilson Conference Center in Washington, D.C., on Dec. 16, 2015. Chip Somodevilla/Getty Images
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NEW HAVEN—The Fed’s end-of-year decision to raise the interest rate was presented as the “normalization” of monetary policy and the end of the era of the 2007–2008 financial crisis. Ending seven years of loose monetary policy will not only shape U.S. financial markets, but will have profound effects on economies and even politics across the world. Emerging markets, increasingly dependent on the flood of investment fleeing the United States, will face challenges as the higher interest rates may make them less attractive for foreign investors.

In the eyes of the U.S. Federal Reserve, the financial crisis is over. After a year marked by great uncertainty about future monetary policy, the Fed hiked its headline interest rate by 0.25 percent in December. That decision put an end to seven years of loose monetary policy, during which the Fed sought to counteract the financial crisis and subsequent recession by traditional means such as interest-rate cuts and untraditional means, such as buying financial assets, a policy known as quantitative easing. Market prices suggest the Fed will increase interest rates by a total of 1 percent during 2016.

In the eyes of the U.S. Federal Reserve, the financial crisis is over.
Chris Miller
Chris Miller
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