. the situation deteriorated rapidly in september 2008, following the default of lehman brothers, the large u. s. investment bank, and the rescue of a. i. g., the largest u. s. insurance company. these events prompted a huge increase in perceived counterparty risk as banks faced large writedowns. moreover, the solvency of some of the most established financial firms came into question, market volatility surged, and liquidity dried up. in effect, the entire u. s. financial system was put under severe strain. the impact of these events was felt across the global economic and financial systems, and the world economy entered its sharpest downturn since the great depression of the 1930s. a striking feature of this crisis has been the successive revisions – all in a downward direction – of global growth forecasts. to give an example, one year ago the imf forecasted that global growth in 2009 would be 3. 8 per cent. in october of last year – that is, shortly after the events of lehman brothers and a. i. g. – the imf reduced its global growth projection for 2009 to 3. 0 per cent, lower, to be sure, than the earlier forecast, but still a fairly robust rate. in january of this year, the imf again reduced its growth forecast for 2009, this time to 0. 5 per cent. several weeks ago, the imf released a new forecast. the imf now projects that global growth will turn negative – on the order of 1. 3 per cent – this year. what happened to produce such a dramatic turnaround? because the banking system was at the epicenter of the crisis, the ramifications were quickly transmitted to all sectors in all countries of the global economy, and were magnified by a collapse in business and consumer confidence. historical evidence confirms that financial crises are more likely to be followed by severe economic downturns when they are centered in the banking system and occur in the context of rapid build - ups of credit and house prices – characteristics that were features of the present crisis. adding to the strains, the turbulence exposed long - simmering internal vulnerabilities within some emerging economies, focusing investors'attention on currency mismatches on borrower's balance sheets and excessive credit growth in those economies. moreover, the severity of the crisis has been exacerbated by a corrosive feedback loop between the financial and the real sectors of the economy, which has,

view is that it is not only a question of when, but perhaps more importantly a question of the trajectory of interest rates following the fed ’ s rate hike, i. e. if the subsequent tightening will be shallow or steep. of course, the exact timing is important, the last interest rate change was in late 2008, whereas the last hike was a decade ago ( june 2006 ). however, unless you are a bond trader, the scale and length of the tightening cycle matter more. here are some stylised facts from previous tightening cycles in the us ( twelve cycles during the last 50 years ) : • the average tightening cycle duration is less than 2 years, although in the last twenty years the average duration is about one year ; • the average increase in the base interest rate is 3 percentage points ; • a recession follows about three years following the fed ’ s decision to raises rates for the first time in years. it is the path of interest rates after the first hike that matters most because this path determines how much support the economy will be getting from the fed. so the big question this time around is whether rates will rise quickly or slowly in 2016. the answer is pretty straightforward : slowly. in the past, each fed rate increase was soon followed by other central bank rate rises. this time, given divergent monetary paths ( mainly the qe programmes in europe and japan ), a us rate hike is expected to be followed by a us dollar appreciation, given that foreign capital will take advantage of more attractive yields driving the us currency higher and also given the us dollar ’ s role as a safe haven currency. this will further tighten policy since a higher exchange rate will reduce the price of imports and hence inflation. indeed, since early january, the us dollar appreciated against the euro by more than 7 % ( € / us $ : from 1. 20 to 1. 12 ), while it appreciated against the yen by 4 % ( from 119 to 124 ) and the british pound by 3 % ( from 0. 64 to 0. 66 ). the above reasoning suggests that the next us tightening cycle will be shorter and shallower than in the past. in other words, i tend to be more on the side of futures markets than of fed officials as far as the prediction about the level of the base rate at the end of 2016 is concerned. as shown in chart 9, fed officials think that a growing economy will allow the central bank to increase its target significantly over the following year or