Why Janet Yellen Might Avoid the Curse That's Struck Other Central Bankers Who Tried to Hike

This time is different?

Federal Reserve Bank Chair Janet Yellen.

Photographer: Chip Somodevilla/Getty Images

If Janet Yellen and her colleagues at the Federal Reserve do decide on Thursday to inch interest rates higher, they'll be fervently hoping that they won't be returning to the zero lower bound soon.

As Bloomberg's Simon Kennedy observed, there's a long list of central banks in developed nations—the Reserve Bank of Australia, European Central Bank, Riksbank, and Norges Bank, to name a few—that have embarked on rate hike cycles since the end of the Great Recession. These tightening phases have proved to be short-lived, however, as monetary policymakers have since been forced to reapply stimulus as their respective domestic backdrops deteriorated.

That's a course of action the Federal Reserve is determined to avoid.

Ken Rogoff, a professor at Harvard University and former chief economist at the International Monetary Fund, separately noted that having to reverse a hike would raise undue questions and uncertainty about the Federal Reserve's path and reaction function.

But Neil Dutta, head of U.S. economics at Renaissance Macro, doesn't find the comparisons to back-tracking central banks to be very compelling.

The factors that have prompted interest rate cuts from these central banks don't necessarily hold across the rest of the world, he argues, and certainly aren't applicable to the U.S.

"In our view, this has a lot less to do with secular stagnation risks and a lot more to do with a commodity boom gone bust and slowing cross-country trade dynamics," writes Dutta.

DuttaCountriesCut
Renaissance Macro

Central banks that have been forced to reverse interest rate hike have a few things in common, notes Dutta:

First, they are relatively small economies. Second, they are very open economies with a high export share relative to GDP. Third, many of these countries – Norway, Canada, Australia, Chile, and New Zealand – are heavily involved in resource extraction.

The U.S. doesn't meet any of those three criteria. It's the world's largest economy, trade doesn't make up an outsize share of aggregate activity, and it isn't reliant on iron ore or oil prices to anywhere near the same extent as such countries as Australia or Canada, respectively.

And as for the EU? Well, that case was different, with Dutta noting that the European Central Bank's decision to hike rates twice in 2011 constituted a policy error.