Macroscope | Fed may be the least of investors’ concerns in 2016

On Wednesday, international investors witnessed the financial equivalent of a space shuttle launch when the US Federal Reserve, the world’s most important central bank, increased its benchmark interest rate for the first time in nearly a decade, putting an end to seven years of zero interest rate policy (ZIRP).

Make no mistake about it, the 25 basis point increase in the Fed’s overnight federal funds rate target is a historic decision that has already had a major impact on capital flows and foreign exchange markets the world over.

It has also been the longest-awaited and most painstakingly telegraphed tightening in monetary policy in the history of modern central banking.

Unlike the “taper tantrum” triggered by the Fed’s unexpected decision in May 2013 to start winding down its programme of quantitative easing (QE), the surprise this time round would have been if the Fed kept rates on hold.

The benchmark S&P 500 equity index rose 1.5 per cent by the end of trading on Wednesday while the Vix index, Wall Street’s so-called “fear gauge”, fell 15 per cent to just under 18 - below its historic long-term average of 20.