As Biden gets into gear, could a Federal Reserve interest rate rise be on the cards?

The Fed’s dilemma is whether the new US president’s stimulus plan risks overheating the US, given that the economy is being swamped with liquidity from the central bank’s bond buy-back scheme

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Clouds gather as a man rides past the Federal Reserve building in Washington on January 22. While the Fed will want to normalise monetary policy, the outlook for US growth, employment and inflation remains unclear. Photo: Bloomberg

Published: 12:30pm, 26 Jan 2021Updated: 12:32pm, 26 Jan 2021

It is a time of great change in the United States as the presidency of Joe Biden finally gets into gear. With an urgent need to defeat the Covid-19 crisis and repair the US’ beleaguered economy, Biden’s administration will leave no stone unturned in its drive towards faster recovery.

This may not be the best time to be thinking about the US Federal Reserve weighing up its options for future policy tightening, but the whispering campaign for higher US interest rates has already begun. The Fed has spearheaded recovery efforts as far as it can with super-soft monetary policy, but now it’s up to the US government to take the strain of economic reflation going forward.

Global markets had better get used to the notion that borrowing costs will be going up in 2021, and not just in America. Where the US leads on rates, generally the rest of the world follows.

It means a fresh start for the Fed after four years of relentless badgering by former US president Donald Trump to ease policy even further and slash US interest rates into negative territory. The Fed’s long-guarded independence is paramount and may mean that some early countercyclical fine-tuning is overdue.

Donald Trump, then US president, looks on as Jerome Powell, his nominee to become chairman of the US Federal Reserve, speaks at the White House in Washington on November 2, 2017. Trump was frequently critical of Powell and the Fed for not lowering interest rates more quickly. Photo: Reuters

The Fed will want to normalise policy from near-zero interest rates and extended quantitative easing, which has exploded the central bank’s balance sheet assets to an eye-watering US$7.4 trillion.

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