The markets have consistently underestimated the rate at which the Fed has raised rates through this cycle. If the Fed’s statement, or the post-meeting press conference by chairman Jerome Powell, again points to a more aggressive approach to rates than the market has priced in, it will have flow-on effects not just for US interest rates, its economy and currency but for other interest rates, currency markets and economies. Loading The continuing slide in the value of the Australian dollar against the US dollar this year as the interest rate differential opened up – our cash rate is at 1.5 per cent and is likely to remain there for some time whereas its US counterpart has been closer to 2 per cent and rising – illustrates an aspect of the reach of Fed’s decisions into other geographies. Another came with the recent round of bank home loan rate increases. The cost of bank funding – in both offshore wholesale and local bond markets - has risen sharply in response to the rising rate regime in the US and the shift in flows of capital towards the US those higher rates have triggered.

The stronger dollar and increased rates have also been a significant factor in the distress within some emerging market economies, where significant exposures to US dollar-denominated debt have collided with the double-whammy of higher rates and a stronger dollar. Should the Fed statement point to a more aggressive path for future rate hikes than the market has anticipated then we - and the rest of the world - can expect more of the same. Currencies will weaken further and rates will rise higher. Given the traditional inverse correlation between equity and bond markets – share prices fall when bond yields rise – a more aggressive increase in rates than anticipated could also be deflating for US sharemarkets that are trading around historical peaks. There's a good chance the Fed could surprise Wall St. Credit:Michael Nagle That won’t concern the Fed, which has been quite explicit in the past that its sole concern is the US real economy.

There is a reasonable prospect the Fed will surprise the markets. Open Market Committee members once regarded as "doves’’ have recently become significantly more "hawkish’’ as the US economic growth rate, powered by the Trump administration’s tax cuts and increased spending, has spiked above 4 per cent even as the unemployment rate has fallen below 4 per cent. If the Fed were to ratchet up rates more aggressively there would be a collision between the White House’s ambition for even higher economic growth rates and the Fed, which sees its primary responsibility as using monetary policy to help generate sustainable growth with stable inflation. It is also conceivable, given the deficit-funded growth spurt at a time of historically low unemployment and unsustainable US debt levels, that Trump’s economic policies will hit a brick wall. The increased issuance of debt to fund the deficit, which coincides with the drying up of the massive bond and mortgage-buying the Fed undertook during the post-crisis era, should force market rates up to attract investors. Ten-year Treasuries are now yielding 3.1 per cent. They started this year at 2.4 per cent.

There are also the Trump trade policies, which would tend to have inflationary impacts on prices for US businesses and consumers, but deflationary impacts on economic growth. The impact of those policies and the tariff war on China, in particular, extends beyond the US and China (we’re quite exposed to the fallout as a major supplier of raw materials to China) and could threaten global economic growth more broadly, which would also rebound on the US economy. It’s become something of a cliché to say that what matters is not what the Fed does but what it says, but it remains true. That’s why economists and analysts will pore over the language, and the dot points, within not just this Fed’s statement but each one it issues until a more settled consensus emerges about its likely future actions and the US economic outlook.