Federal Reserve interest rate rise

The Federal Reserve increased its interest rate from 0.25% to 0.5% on 16th December 2015. The low interest rate is a consequence of money having low value (due to quantitative easing). The US and world economy are probably not ready for interest rate rises.

Historical point of view:

The interest rate of 0.25%, or 0.5%, is abnormally low, from a historical point of view. The “normal” rate should be above 5%.

Is world economy ready for interest rate increase?

Probably not. The recovery from the 2007-08 crisis is far from complete. With the Chinese economy slowing down, the chance of hitting another, perhaps deeper, recession is seriously higher than economy overheat. It is far too early to bring interest rate up.

Cost to the US

The theoretical effect of interest rate increase:

Theoretically, increasing interest rate should tighten money supply, which should slow spending. It should also increase the strength of dollar against other currencies, which makes export more difficult. Moreover, it should also affect stock prices, as the cost of borrowing is higher.

The rate rise is small:

Quantitative easing means money is cheap:

Money is just another commodity, according to Rothbard (1963). The fact that money can be created out of nothing suggests that money as a commodity should be cheap. With substantial quantitative easing, interest rates should be low -- which they are, quite rightly so. Increasing interest rates would only lead to mis-pricing of money. What are the consequences of mis-pricing an asset?

My conjecture:

I think Fed rates will not rise further in 2016 by beyond a symbolic percentage (e.g. 0.25%), if it rises at all. This is nothing more than a conjecture -- I have no strong theory behind it.

Low inflation - rescue from Chinese goods:

Quantitative easing should have led to high inflation. If there were high inflation, then increasing Fed interest rates would be seen as one way to control inflation. But in reality, the US inflation rate has been low, thanks to cheap import from China.

What if interest rates continues to go up?

If the Federal Reserve rates should go up further to, say, 5%, what impact would it have to world economy? Global economy will suffer. Stock prices could tumble. Confidence will be affected. Should world economy go into recession, China would be where the global economy cycle breaks, according to my theory (2014).

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Related:

• Rothbard, M., "What has Government Done to Our Money?", Ludwig von Mises Institute, fifth edition, 2005 (First published, Murray Rothbard 1963)
• A cycle that keeps everyone happy (for the time being)