$ 1 trillion per year from 2010 to 2014, a level that had only been exceeded once before the global financial crisis. 2 this backdrop, however is likely to change soon. the fed ’ s fomc has, of late, repeatedly expressed its confidence in meeting its dual target of full employment and a return of inflation towards its targeted levels. addressing the house of representatives on 4 november, chair janet yellen remarked that “ if we were to move, say in december, it would be based on an expectation, which i believe is justified, that – with an improving labour market and transitory factors fading – inflation will move up to 2 per cent. ” in the wake of recent fed communication we can refer, among others, to “ the macroeconomic effects of the federal reserve ’ s unconventional monetary policies ” by eric m engen, thomas t laubach and david reifschneider, finance and economics discussion series 2015 – 005, washington, dc : federal reserve board, 2015. see “ capital flows to emerging markets ”, institute of international finance, 1 october 2015. bis central bankers ’ speeches and us labour market data, financial market participants are now discounting an approximate 65 per cent probability of a hike in the fed funds future on 16 december. by the end of next year, market participants see fed funds around 0, 75 to 1, 00 per cent, while the median projection of fomc members currently lies at 1, 4 per cent. why does it matter for south africa? on its own, a slow and gradual normalisation of us monetary policy need not be negative for south africa, or indeed for the emerging world as a whole. the reasoning being that if the fed is considering a “ lift - off ” in its policy rate, it is because in their view the us economy has recovered sufficiently from the legacies of the global financial crisis, and that it can continue growing at a steady and sustainable pace without further need for unusually large accommodation. secondly, the normalisation path is likely to be very gradual. nonetheless, because of the role that us policy played in encouraging inflows to emerging markets in particular and “ risky ” assets in general, many people are awaiting the prospective us rate “ lift - off ” with elevated nervousness. volatility has risen across a broad range of assets ; the rand, together with other major emerging currencies, has come under pressure ; and some observers have asked the question whether the south african reserve bank ( sar

aimed at keeping inflation low is anti - growth is simply wrong. there is no permanent trade - off between inflation and unemployment, and even the short - run trade - off tends to be elusive in an environment where expectations formation is increasingly sophisticated and forward - looking. that said, getting from high inflation to low inflation requires a sustained tight monetary policy. it cannot be denied that a tightening of policy will tend to hurt short - term growth, just as getting fit invariably requires some sacrifice by the athlete. but south africa ’ s experience under formal inflation targeting has been relatively favourable. when in late 2001 and during 2002 the inflation targeting framework was severely tested on account of an extraordinary depreciation of the exchange rate of the rand which fuelled inflation, the bank had to raise short - term interest rates by a total of 4 percentage points. alongside a conservative fiscal policy and a recovery in the exchange value of the rand, this was enough to first brake and later on reverse the acceleration in inflation. this was done with quite limited loss of real output, partly because of the stimulation to the tradables sector imparted during 2002 by the over depreciated exchange value of the rand, and partly because policymakers deliberately refrained from raising interest rates excessively, mindful of the lags characteristic of the transmission of monetary policy to the economy. thorough investigation of the business cycle reveals that the economy remained in an upward phase of the business cycle throughout the period of tighter policy in 2002 and 2003. in fact, the upswing has now been sustained for some six years. being directed at combating inflation with a medium - term orientation, the other side to the coin of the inflation targeting framework which has been adopted in south africa is that real interest rates are likely to remain positive under virtually all circumstances. this supports balanced and sound growth, inter alia by ensuring that the relative prices of the factors of production are reasonably aligned with their true scarcities. previous experimentation with negative real interest rates in the 1970s and 1980s contributed to suboptimal allocation of scarce capital, excessive capital intensity in production and weak growth outcomes. avoiding this obvious pitfall is a very important contribution which monetary policy can make, at the same time helping to ensure fair returns to savers and combating the deterioration in the national saving rate. what monetary policy cannot do unrealistic expectations regarding what monetary policy can do abound. while monetary policy can contain inflation, reduce inflation risk and uncertainty premia in the economy, ease