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Updated 09:28 28/09/20

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Why the coming U.S. interest rate hike is like never before

Duncan Richardson, News Editor
14 Dec 2015, 11:10 a.m.

The Federal Reserve is set to raise interest rates on Wednesday for the first time in a decade. If they do, they will be raising rates at the same time the oil price is plummeting and commodity prices are in freefall.

The U.S economy has become addicted to stimulus and cheap money. Should this policy be reversed the U.S. dollar is likely to soar making U.S exports even more expensive. Despite positive jobs data the U.S. labour market is a long way from full employment. A rate rise will choke off any growth in the U.S economy and paralyse economies which have borrowed in U.S. dollars. By flooding the global economy with trillions of dollars the Fed has caused capital to be misallocated at levels never seen before.

Yields on junk bonds are rising fast and are a sign the credit markets can’t cope with a rate rise. Last week Third Avenue Management stopped withdrawals from their $788 million credit mutual fund. Could this be the first sign the credit markets are freezing up?

If they do hike rates on Wednesday, many are suggesting the next move will be down again and perhaps like in Europe into negative territory.

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