Sharemarkets fell sharply last week on reports that at least two members of the US Federal Reserve board favour raising its base interest rate when it meets this week. The markets bounced back but more turbulence is possible before the Federal Reserve announces its decision on Thursday. Sharemarket falls always sound like bad news but sometimes they are not. This is one such time.
The US economy, like those of Europe and Japan, has been trying to return to sustained growth on very low interest rates and other monetary stimulants for the eight years since the global financial crisis. Each time the US has recorded some job growth, the Fed has started to reduce the stimulus, only to freeze when markets got the jitters. It lifted its federal funds rate from near zero last December and programmed further rises this year but those were quickly put on hold.
Speaking to its annual conclave at Jackson Hole, Wyoming, last month, chairwoman Janet Yellen gave a confident view of the US economy, reviving expectations of further rate increases this year. One of them could come on Thursday and it would be very good news if it does. If sharemarkets fall as a result and the Fed holds its nerve in the weeks ahead, it would be even better.
Sharemarkets are high almost everywhere only because interest rates are too low, wealth is looking for inflation refuges in stocks and property and business is not investing for expansion until it sees the economy functioning without stimulants.
After eight years, the sooner business sees the end of stimulants, the better for all countries, including New Zealand. This country has just recorded 3.6 percent growth for the year to June, one of the strongest growth rates in the world at present. But it has also had one of the fastest rates of house price inflation in the world and the Reserve Bank has been unable to raise interest rates to restrain that market because interest rates elsewhere are so low. If ours get too far out of line, the dollar will go even higher and exporters will suffer.
