Fed Interest Rate Rise And The New Normal

Market Update

The US Federal Reserve interest rate was one of the financial world’s worst kept secrets.

The Fed chair Janet Yellen had dropped hints for weeks that the rise was on the way in order not to spook the markets.

Then, on cue, she announced hoisting the rate by 0.25% to0.5% – the first increase in the US for nine years and the first major economy to put up rates since the credit crisis of 2007.

For many fund managers and investors, this is the first time they will have to tackle the impact of an interest rate rise, and more importantly deal with the fall out as a strengthening US dollar and economy is expected to weigh heavily on emerging market economies,” said Chris Ferguson of Credence International.

“The rate rise is generally a good thing. It shows the US economy is on a sound footing and that the world is on the way back to an environment of more normal interest rates, although we won’t get there for a year or two yet.”

Impact for consumers and investors

The Fed has suggested that normal interest rates will be between 2% and 3%, but only expects to gently pump up the rate to 1.25% by the end of next year.

The Bank of England has also strongly hinted that rates are ready to rise in the UK as well, and is expected to follow the US Fed lead early in the New Year.

So what does all this mean for consumers and investors?

Almost certainly, investors and savers holding US dollars will see a better return on their money.

The flipside is the cost of borrowing will rise and the Fed will have to keep a watchful eye on the cost of US exports as the dollar strengthens against emerging market currencies.

Confidence in economy

“The rate increase is the Federal Reserve showing how much confidence the money men and economists have in the US economy and that they expect to easily withstand this increase and to see growth continue,” said Ferguson.

Ferguson explained some pain is expected for companies and countries with debt denominated in dollars as their borrowings will cost them more to service.

“Nevertheless, the rate rise is modest and over recent years, many companies have reduced borrowing and are sitting on cash piles,” said Ferguson. “The same goes for consumers who have less debt and are seeing their incomes increase.”


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