Just over a week ago the world's most powerful central banker Janet Yellen gave her clearest signal yet that she would raise interest rates this week.
"A further adjustment of the federal funds rate would likely be appropriate," the Federal Reserve chair said in a much-quoted portion of her speech.
Some commentators, including central banking scholar Sebastian Mallaby, think raising rates by a quarter-point is not enough. Last week Mallaby, winner of the 2016 Financial Times book of the year, reiterated his recommendation that Yellen should double down and increase interest rates by a half a percentage point to force the markets into paying attention.
Yet despite repeated warnings from Yellen of three quarter-point interest rate rises in 2017, market traders seem to be hardly reacting. In the first months of the year, the Dow Jones industrial average has passed through 20,000 and then 21,000 with only a small retreat.
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Of course one reason markets keep climbing may be that traders really think the economy is on a breakaway.
Whether based on irrational euphoria or concrete evidence, under that scenario, the market has decided that U.S. President Donald Trump's promised tax cuts, deregulation and stimulus spending will overcome the impact of a whole series of rate rises.
In the business press, the assumption everywhere is that a rate rise this Wednesday is inevitable. Bond interest rates have swept higher. On Friday, jobs numbers in both the U.S. and Canada showed unemployment low and jobs growing.
So why would anyone think that Yellen and her advisers would threaten to raise interest rates sharply and then fail to do it?
Well, for one thing, she's done it before. Repeatedly.
More costly borrowing
It wasn't so long ago that Yellen stood up in front of reporters and announced that the Fed was expecting four quarter-point increases (moves of 25 basis points each) annually.
"Participants are projecting — of course, there's a lot of uncertainty — but they're projecting increases that average around 100 basis points per year," said Yellen in June 2015.
That kind of rise in interest rates is not to be sneezed at. Deals based on borrowing at two or three per cent look distinctly different at four or five per cent.
As we reported at the time, rate increases of that magnitude would have an impact far beyond the U.S. As higher interest rates inevitably creep across the border into Canada, all of a sudden Canadian mortgages and other loans begin to look pricey.
However, in the more than a year and a half since that pronouncement by Yellen, there was a single quarter-point rise in 2015 and another at the end of 2016.
Yellen's justification for not raising rates despite repeated forecasts is that conditions have changed.
But it's not as if the warnings have not had an effect. Just as Canadian homebuyers are forced to take future rate rises into account when deciding how much house they can afford, the simple threat of rate increases alters the market.
Like a missile in its silo or an unfired gun, such a threat has its own unique power.
Perhaps we can picture Yellen (wearing a slouch fedora?) holding her small gun on a room full of market traders.
"I really mean it. I'm telling you, I'll do it," Yellen would say.
As we have seen repeatedly, including following last week's speech, warnings have a direct effect on bond rates without the Fed taking any action at all. As with the Canadian homebuyer, higher bond rates and the expectation of future increases have a restraining effect on the economy.
And there are reasons why a threat can be better than action.
Although the economy seems to be strengthening, there are still no signs of a full-fledged post-crash boom typical of previous recoveries. Headline inflation has been higher, pushed by rising energy prices, but as we saw last week when oil crashed by five per cent in a day, headline inflation can be volatile.
There are widespread fears that markets are overvalued and could be teetering on the verge of a new decline.
A sharp rise in rates, or a series of rises that come too early, could crush what Bank of Canada governor Stephen Poloz likes to call the tender "green shoots" of a recovering economy.
Fed as black hat
Especially in the current political climate, with the Trump administration ready to turn on the Fed, Yellen and her advisers know it would not be good for central banking to be portrayed as the black hat that single-handedly crashed the recovery.
Even in her most recent speech, Yellen was careful to qualify her "would likely be appropriate" comments with the reservation that any move depended on conditions continuing "to evolve in line with our expectations."
Of course, the threats can only go so far. Last year, Yellen increased her credibility just after the election when, after so many warnings, she finally fired a shot in the air with the small December increase.
But if she thinks people aren't taking her warnings seriously, if the grumbling crowd begins to take a collective step forward, there is only one thing for Yellen to do: She must raise rates and show herself determined to keep raising.
And whether or not she pulls the trigger on Wednesday, it is only the conviction that she will actually do it when it is finally necessary that gives the central bank its power.
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