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The impact of the US interest rate rises

Paul Abberley, Charles Stanley CEO comments on the recent Federal Reserve US interest rate rise.

by
Paul Abberley

21.12.2016

On December 15 the Federal Reserve increased US interest rates. It was only by a quarter of one per cent but was still newsworthy because it is only the second increase since the financial crisis. A mildly negative initial reaction rippled through US markets. Three questions arise for UK investors:

· Is this the beginning of a series of US rate increases?

· Will US market reactions influence UK investments?

· Will the Bank of England follow suit?

Although the central bank indicated it was possible that there could be as many as three interest rate rises next year, we believe the US authorities will continue to act cautiously. Rate increases are likely to remain small and infrequent. It is uncertain just how sensitive the economy is to interest rate changes nowadays and the Federal Reserve does not want to risk tipping the economy into recession. While the Trump administration will seek to cut taxes and increase spending, which might warrant higher interest rates, this will all take some time to implement. Indeed the futures market is not fully pricing in a rate hike in the US until June 2017.

If rates do continue to rise, the impact on markets could be significant. A key driver in recent times has been the search for yield amidst near-zero interest rates. In many cases, the prices of investments offering income have risen sharply. However, as interest rates increase, the relative attraction of higher yielding investments could diminish, and this has implications for all types of asset class, including equities.

Trends in the US do impact UK markets. Indeed, they reacted in the 24 hours following the announcement. The global influence upon our markets is often underappreciated, but the outcome remains unclear as central banks around the world pursue unconventional policies such as quantitative easing

Will the Bank of England take its lead from the US and start increasing interest rates in the UK? This would be most unlikely because the economic environment here is quite different. Specifically, the Bank of England remains very nervous about the implications of the EU referendum result on the UK economy. So UK interest rates should remain very low, even if US rates do begin to ascend.

Future interest rate increases in the US are likely to be small and very gradual, but some impact on investment trends is nevertheless likely and will flow through to UK markets, whilst the Bank of England will make it decisions based on the unique circumstances facing the UK economy.

We firmly believe Charles Stanley’s long-standing experience in managing assets during times of potential volatility and uncertainty will help us navigate these markets.

Paul Abberley

CEO

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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