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Trending: US rate hike now – or face recession

Last updated: 20:35 12 Oct 2016 BST, First published: 15:35 12 Oct 2016 BST

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US stock markets rose after the Federal Reserve’s much-awaited minutes were released on Wednesday – but the central bank had a dissenting voice: delay hiking rates and it spells recession.

September's Federal Open Market Committee meeting featured something not often seen since Janet Yellen took over as chair - dissent. Three of the FOMC's 10 voting members opposed the final statement last month, which communicated that central bank officials still felt it prudent to keep its interest rate target anchored at 0.25% to 0.5%. The three dissenters — Esther George, Loretta Mester and Eric Rosengren — wanted to hike rates a quarter point.

Rates have been accommodative, easy money for eight years. Although last December rates were finally hiked by 25 basis points from a range of zero to 0.25%, the truth is that even rates at 2% would be considered accommodative, at least historically.

Last month’s meeting was a crucial battle at the FOMC as the only real last opportunity to change monetary before the final furlong of the US presidential and congressional elections in early November.

The meeting passed without change to rates, so now the big money is on a hike in December, after the elections.

Normally, policymakers are worried about raising interest rates too soon when an economy is coming out of a frail spell. They are normally concerned not to kill off the green shoots of recovery by hastily adhering to tight credit.

But this time around, the hawks on the FOMC are telling us that it can work both ways. Meaning a delay in raising interest rates when an economy is already recovering can result in recession too.

The logic to this view is that is if the economy overheats because easy money goes on for too long then it will necessitate a series of more aggressive rate hikes later on, which because of their potency and the lack of periods between such hikes to assess the effects properly could mean the central bank basically messes up – and sends the economy into recession.

The markets may have taken it in their stride on Wednesday, largely there was nothing awful in the minutes and a degree of certainty has now been afforded by them.

Traders still expect the Fed to announce a hike in December, though the probability is less than 60%.

But even if rates were to rise in quick succession, a flurry of 25-basis-point hikes would still take time to hit 2 percentage points. But with inflation at less than 2% and the world economy still on crutches as the European Central Bank, Bank of England and Bank of Japan practise policies of monetary largesse, there is a huge feeling that rate hikes must be moderated. For that to be possible, December really is the starting gun point for a hike.

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