By the time it came, the US Federal Reserve’s first interest rate rise in 2016 - only the second since the tightening cycle began last year - was no surprise. The ground had been carefully prepared by comments from officials.
But the fact that Wednesday’s move was expected does not mean it was wise. The Fed has been hunting around for evidence to raise rates for a while, in the belief that monetary policy is unnaturally loose and it should seize any credible excuse to tighten.
The problem with this approach is that it risks premature rises on the basis of overinterpreted data. On balance, that is what the Fed has done on this occasion.
If Donald Trump, as promised, executes a large fiscal expansion in the coming years, tighter monetary policy will most likely be needed. But at present, with inflation having undershot the target for so long and inflation expectations still low, there is no compelling reason to raise the cost of borrowing. This is all the more true when higher long-term rates and a stronger dollar - the market’s response to the anticipated Trump programme - are tightening the monetary conditions already.
As it has for years, the Fed pinned its expectation of future higher inflation on expansion in the real side of the economy, particularly the labour market. But while unemployment has continued to decline, evidence of a wage-price spiral remains thin. Inflation has consistently undershot forecasts - including the Fed’s - in recent years despite reasonable economic growth, suggesting that estimates of full capacity in the economy are unreliable guides for monetary policy.
A rebalancing of monetary policy based on a more expansionary fiscal policy would be welcome. But Mr Trump’s infrastructure spending plans remain opaque. Some of his comments suggest giving tax cuts to corporations without increasing investment. It is premature to be raising borrowing costs - or indeed signalling higher rates next year - on the basis of second-guessing what may happen.
The same applies to any effort to forestall influence Mr Trump may seek to exert on the Fed, not least because the direction of such pressure will be unclear. During the election campaign the Republican candidate strongly criticised Janet Yellen, the Fed chair, for keeping interest rates low.
Yet Mr Trump’s interests may change once he is in office and wants strong growth to boost his popularity. In the past Mr Trump has described himself as a “low interest rate guy,” and few property developers have an instinctive aversion to cheap money.
Fed policymakers would therefore be unwise to second-guess Mr Trump’s attitude towards fiscal policy, or towards the central bank itself, let alone the appointments he may make to fill forthcoming vacancies on the FOMC. The Fed has been fortunate since the early 1990s in having presidents who, by and large, respected its independence and refrained from sharp public criticism or from trying to pack it with ideological placepeople. That may cease to be the case. There is little the Fed can or should do about it now.
Now the Fed has pulled the trigger on rate, it needs to avoid giving the impression that it is only a matter of time before it expends more ammunition. It should not hesitate to change its forecast of three hikes next year.
Politically and economically, the US will enter a period of intense uncertainty next year. It needs a central bank prepared to react to events, not push ahead with a predetermined policy that may turn out to be inappropriate.