In order to stimulate the US economy, the Fed has maintained the borrowing costs during the past years close to zero. Key indicators such as the rate of unemployed people, have become, at least statistically, better in the recent quarters. During the past weeks, the current central bank’s chief has prepared the larger public, investors, and the economy, for an interest rate increase. This incrementally results in higher borrowing costs.
While the first increase of either 1/8 or ¼ is not necessary of importance, what matters is the language used to announce the increase and the way of going forward, i.e. are there 2, 3, or more to come. Whatever will be decided by the FED between today and tomorrow, the ramifications of its decision will have an impact beyond the world’s largest economy, with the most important being an appreciation of the USD versus the rest of the world. We believe that the USD will appreciate, for instance versus the Euro, to 0.95 within the next 15 to 18 months.