Fed declares end to debt crisis, world turns wary

New Haven

THE Fed's end-of-year decision to raise the interest rate was presented as the "normalisation" 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 US financial markets, but will have profound effects on economies and even politics across the world. Emerging markets, increasingly dependent on the flood of funds fleeing the US, will face challenges as the higher interest rates may make them less attractive for foreign investors.

In the eyes of the US 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 percentage point in December. Over the seven years of loose monetary policy, 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 one percentage point during 2016.