Economist Steen Jakobsen says Fed rate rises will drive demand for credit

Saxo Bank's chief economist Steen Jakobsen also says market reaction to Thursday's long-awaited 25-basis point Fed tightening won't stay muted for long, as investors return from Christmas and New Year holidays and then the Fed starts delivering on the four further rate hikes signalled for next year.

"Historically, the Fed does tend to deliver what they promise in terms of hikes, and in this case it's four," he told The Australian Financial Review from Copenhagen.

"I think most participants in the market are somewhere between one and two additional hikes in 2016, so that down the line will be a surprise for the market, and that will probably set up some nervousness and bouts of volatility in 2016," he said.

Part of the Fed's drive, he says, will come from the return of inflationary pressures as energy costs stabilise and demand for bank credit, which has remained subdued around the world despite near-zero base interest rates, begins to grow.

"I know a lot of economists claim that inflation comes from wage demand, but academically that's not true," he said.

"Velocity of money is what creates inflation, and velocity of money is driven by loan demand.

"I actually think that the higher interest rate will increase the demand for loans, because as the interest rate goes up, the banks become more capitalised in terms of their ability to have a margin.''

On the demand side, people and businesses hadn't been borrowing because, spooked by the global financial crisis, they focused on paying down debt, he said.

"I think it's very much the case that, yes, the bank will lend you money, but it will be at a margin that is so high that in an environment where people are being told again and again that there are zero interest rates, people have been waiting.

"The fact that interest rates are going up will actually make people rush to seek financing and get the credit in place."

All this, he says, is ultimately good news for the world's biggest economy, which had feared the arrival of the same deflationary pressures that have bedevilled Europe, Japan and even China.

He says although the first half of next year will be difficult for commodity exporters, particularly those who rely on oil, growth in the US, a pick-up in inflation and a partly refugee-fuelled improvement in Europe's fortunes makes for a "positive second half".

"Possibly for the first time in my career as an economist, I'm very positive on Europe for the next 10 years," he said.

"Refugees are a political issue and I'm not going to be the judge of what's right of wrong.

"But as of today there are 1 million more people in Germany – they will need kindergartens, trains, buses, airports, infrastructure and everything else.

"Europe is going to have a massive end-demand for infrastructure investment," he said, adding that rules on fiscal deficits in the European Union would be relaxed to meet this.

Australia, too, was on the right track under the government of Malcolm Turnbull, he said, although it still faced a difficult first half as commodity prices and investment found their bottom.

In the same vein, and as forecast in one of his more serious "outrageous predictions" on Thursday, oil, too, would bottom out as the Organisation of Petroleum Exporting Countries finally agreed to production cuts to push up prices. This, in turn, would added to much-needed inflationary pressures around the world.

From another of his more serious traditional Yuletide predictions, Mr Jakobsen says the most extreme El Nino on record will drive down crop yields, which will push up food prices. This will also bolster energy costs as drought interrupts hydro-electric production, lifting demand for fossil fuels.

Again, global inflation, long-gone and now missed, returns with a vengeance.

"So I actually think that 2016 is going to be better than expected, but I also think that it's going to be a year of two halves," he said.