When base interest rates are at zero and have been there for six years, there is only really one direction that rates can go (although some central banks have considered negative rates –i.e. charging depositors for leaving money with the bank). The question for the business community is when will rates be rising, rather than if they will increase.
Minutes for the April meeting of the US Federal Reserve show that discussions have taken place on how the short-term interest rate will be increased. The fact that the subject was broached does not mean that a rise is imminent – indeed most observers believe that an increase is still more than a year off. As the minutes of the meeting noted: "The committee's discussion of this topic was undertaken as part of prudent planning and did not imply that normalization would necessarily begin sometime soon."
It would seem logical for the Federal Reserve to complete the “Taper” of asset purchases before moving to more classical monetary tightening represented by a rate hike. The “Taper” has seen the reduction of the quantitative easing which injected $85 billion a month through asset purchases at its height to $45 billion a month currently. The aim of the asset purchase programme was to inject liquidity into the US economy whilst keeping long-term and mortgage borrowing costs low by providing a good market for such assets. The purpose of injection of liquidity into the economy was to provide funds for loans to businesses, cheaply, to encourage business expansion and so boost the recovery – in truth, this has only been partially successful to date. The Federal Reserve expects US growth to strengthen later in the year, predicting that it will return to “a trajectory of moderate growth”.
Whilst US unemployment is falling, the Federal Reserve remains cautious about any move which could jeopardise this improvement.