The world must cope with an economy that is back to normal

The consensus is for decent growth just about everywhere next year. No major economy is expected to go into recession

Janet Yellen, the Federal Reserve Board chair, testifies in front of US Congress's Joint Economic Committee on Friday (AP)

Today, at 7.30pm our time, the Federal Reserve Board will mark the beginning of the end of cheap money. It is so widely expected that it will announce the first increase in US interest rates since 2006, for the ground has been so well prepared by its chair, Janet Yellen, that were it not to do so would be astounding. If you count the filing for bankruptcy by Lehman Brothers on 15 September 2008 as the seminal moment of the financial crisis that led to the policy of ultra-easy money, then now – more than seven years later, on 16 December 2015 – the US economy is at last deemed strong enough for policy to begin its return to normality.

In other respects, the US has already got back to normal. Output is well past its previous peak, unemployment is down to 5 per cent and while average house prices have yet to pass their past peak, they are on track to do so within the next 18 months.

But an economy that has to be pumped up by near-zero official interest rates, with all the distortions and inequities such a policy creates, cannot be considered normal. Since we have never had such a long period of such low rates during peacetime, we have no experience of what happens when the policy is reversed. This is a journey without maps.

Without maps, perhaps, but not without forecasts. The expected increase coincides with the year-end forecasting season. Quite what will happen to US monetary policy, and the consequences of that for the rest of us, are among the possibilities that the forecasters have to scoop up. Indeed, that is where most forecasters begin: it will be a year of rising interest rates as normal times gradually return to the developed world.

That includes rising rates here in Britain. Quite when the Bank of England will increase its official rates remains a bit of a mystery. The official guidance from Mark Carney was that the first increase would come around the end of this year but not many people now expect an increase in February, the date of the Bank’s next Inflation Report, the data within which might (or might not) give the justification for an increase.

But forecasters do expect some rise during the year. If you take forecasts for the three-month interbank rate, a key rate for the banks in determining how much they charge for mortgages and other loans, these increase from the present level of 0.6 per cent up to 1 per cent and beyond by the end of next year. Our largest bank, HSBC, is forecasting 1.6 per cent by December 2016.

So how will the world cope? A lot depends on the profile of these increases. They are expected to be very gradual, but maybe they will be quicker. Everyone today will be looking at what clues there are to this. It depends also on whether there is unexpected fallout in, for example, the emerging nations. The US has been spraying cheap dollars around the world and, if those dollars become a bit more expensive, maybe there will be unforeseen and unpleasant consequences. Fear of this has been one of the factors driving the retreat from emerging markets during the past year.

At lot depends, too, on the transmission mechanism through the foreign exchanges. The dollar is strong already, and if it becomes super-strong, that might disrupt other countries. Will the euro continue its plunge, and if so, how will Germany feel about having an even weaker currency? But if you look at the various currency predictions, as collated by Consensus Forecasts, they are pretty benign. On average they show dollar/euro and dollar/sterling rates at the end of both next year and the year after pretty much where they are now.

The consensus, too, is for decent growth just about everywhere next year. Not one single major economy is expected to go into recession. Even laggards are expected to pick up pace, with for example Italy growing at 1.3 per cent. We are expected to grow at 2.3 per cent, the US at 2.5 per cent, and so on. But while we should respect these forecasts because they reflect what clever people who spend their lives forecasting expect to happen, we should also be aware that they are likely to be very wrong. Or rather, while they may be more or less right in their macroeconomic perspective, they will inevitably miss some spectacular disruptive events that will happen in the coming year.

One of those may well be an adverse reaction to rising interest rates. But there are many others, including a neat list set out yesterday by Bloomberg. These are: the oil price going back to $100 a barrel as Isis destroys oil facilities across the Middle East; banks being hit by a cyber attack; the EU crumbling under anti-immigration fears; China’s economy falling and the military rising; Israel attacking Iran’s nuclear plants; Putin sidelining America; climate change getting much worse; the Latin American economy collapsing; Trump becoming president; and the UK leaving the EU.

Well, whether or not you think that our voting to leave the EU should be ranked alongside Isis destroying the oil wells and Trump becoming president as a “black swan” disaster, the exercise is helpful in that it reminds us all that disruptive events do happen. Actually, the real concern may not so much be these usual suspects that the Bloomberg writers have rounded up, but rather the more conventional threat of the apparently decent recovery petering out to a crawl. If that were to happen, there would be nothing in the policymakers’ armoury left to fire to keep things going. Cutting interest rates when they had barely begun to rise would hardly help.

Often, though, the conventional outlook turns out to be the best guide for us all. We get higher interest rates because things are indeed returning to normal, or whatever counts as normal in an inevitably turbulent global economy.

The Fed’s decision today should be welcomed. The grown-ups are still sort of in charge.