As Charles Dickens wrote of revolutionary France and Britain: “It was the best of times, it was the worst of times.” Economic conditions for the masses far lagged those of the aristocracy. Today’s elites include bankers and politicians. The masses are disillusioned citizens voting their frustration. That dichotomy is the difference between what central banks say and what people feel.

Last week, the US Federal Reserve raised interest rates by a quarter point. The financial press applauded the start of a tightening phase as reflecting economic stability.



This happened last year too. On 16 December 2015, the Fed also raised rates by 25 basis points (0.25%). It forecast four rate hikes for 2016. We got one. The forecast is now three for 2017. If the past is prelude, we might get another one. For eight years, the Fed has institutionalised a policy of being wrong, on forecasting rate hikes, economic growth, and financial stability.



That’s why “emergency measures” to provide liquidity (to banks) became an eight-year strategy for providing artificial stimulus to banks and markets. Once the Fed initiated its 2008 zero interest rate policy (ZIRP) and quantitative easing programmes, they were exported globally. Central banks copied these policies and added regional flavour.



Last year, Fed chair Janet Yellen anticipated “gradual adjustments in the stance of monetary policy” with a moderately-paced expansion of economic activity and strengthening of the labour market.



This year, the federal open market committee (FOMC) assured: “The stance of monetary policy remains accommodative.” According to Yellen, the Fed is acting “under a cloud of uncertainty”. That’s code for waiting for the other shoe to drop, on the markets or banks. The message is that rate hikes follow economic growth. But voting in the US and globally says something else.

During the first presidential debate, Donald Trump accused “this Janet Yellen of the Fed” of being “political by keeping the interest rates at this level”. Establishment democrats that supported Hillary Clinton were enraged. They noted the real economy wasn’t as bad as Trump made out. Yet Trump won. Not because his voters were racist, xenophobes (though some are), but because of prevalent economic anxieties of working class Americans, notably in the rust-belt states he swept.



For all his bombastic bluster and his selection of the richest cabinet ever, Trump’s read of the population was correct. He captured its participation deficit – in stock market escalation, bank resurrections, and glorified reductions in headline unemployment figures. And the anger.



From Brexit to Trump to trans-European anti-EU votes spanning Italy to eastern Europe (Poland, Hungary, Macedonia, Bulgaria and Moldova) with a looming possibility of Geert Wilders winning the Netherlands’ election in March, and Marine Le Pen in France, financial stability is a core issue.



The average person might have no clue about the particulars of central bank policy fabricating speculative capital. But everyone is well aware that economic rewards floated to the banks and the wealthy. They are desperate for change. Grandiose promises act as immediate salves.



Last year’s Fed rate hike spurred a 10–20% stock market drop depending on the country. To compensate, the Bank of Japan introduced negative interest rate policy in January, and the European Central Bank in March. Both have extended their versions of quantitative easing since.



Not to be outdone, and in a coincidental reaction to Brexit, Bank of England governor Mark Carney slashed rates in Britain from 0.50% to 0.25% in August. In October, despite skirmishes with prime minister Theresa May, he announced he would remain at the Bank of England until 2019, covering the two-year article 50 period.



If we see a repeat of last year’s global reaction to the Fed’s hike, the only major central bank with room to cut rates to zero will be the Bank of England. That signals ZIRP coming to Britain, along with an even lower British pound. This would not help Britain’s mounting job and economic woes any more than any of the other central banks’ manoeuvres did in their countries. But Carney will say it will.



Carney slashed capital requirements in July. He pressed banks to lend more to the real economy. But words aren’t binding. Lenders will do what they have always done: act in their own interest.



Over in the US, Trump selected a cadre of Wall Street and big business sympathisers for his court. They like cheap money. His campaign browbeating of Yellen fell flat given this rate hike. Having chaired Bill Clinton’s council of economic advisers in the 1990s, she also happens to be his link to Clinton. He needs Yellen to go slow on the Fed rate hike gas pedal in order to keep banks and markets happy during his rule. In this Tale of Two Cities, there is only one Fed. Regardless of who is president and what party is in charge, the Fed acts on behalf of the banks and markets.



Fed déjà vu means it’s the same of times.

Nomi Prins is the author of All the Presidents’ Bankers: the Hidden Alliances That Drive American Power





