At this time of year, school plays serve to remind you of new life and the prospect of change. Perhaps a timely message following 2016’s round of shake ups, and some of this week’s news suggests growth could be on the horizon.
This week the much anticipated hike in interest rates from the US Federal Reserve came to fruition. Now on the face of it a change in US interest rates doesn’t sound like it could be that interesting to a UK audience, but this is one of the most significant events of 2016 for the financial markets.
Multiple interest rate hikes
The US interest rate is now 0.75% (by contrast the UK’s base rate is 0.25%), this was expected, but what did come as a surprise was the rhetoric surrounding this increase. Wednesday’s announcement prompted the dollar to strengthen sharply, US bond yields to rise, oil to drop, and there was a bit of a sell-off in equities.
It was also announced that the Federal Reserve expect there to be three interest rate hikes in 2017. It had been anticipated that there would be two. The conviction from the committee suggest a strong macroeconomic picture for the US, which points to a potential acceleration in growth. This idea was also supported by the announcement that the US economy is now close to full employment.
A return to higher interest rates?
The US are the first-movers on the path to interest rate normalisation. I had a conversation just the other day with somebody who remembers receiving 4% on their Cash ISA, they’re now receiving 0.5%. Whilst an increase in US interest rates won’t impact UK savers, it could act as a trigger for other central banks to reassess their policies.
The US economy is one of the main driving forces in the global economy, if it’s healthy and growing, it makes it easier for other economies to grow. The strengthening of the dollar is likely to have benefitted those investors with dollar equity exposure in their investment portfolios. If investors hold US debt however, this won’t have looked quite so positive. But as rates rise, deposits are likely to rise in-line with them and so having investments in multiple areas is a strong strategy.
As we enter 2017, one of the first events will be the inauguration of Donald Trump as President of the US. With Donald Trump has come a rhetoric around fiscal policy and aggressive foreign policy. At the moment this is just speculation, and whilst a switch in regime could impact the markets, to truly encourage growth you also need accommodative monetary policy. A diversified investment portfolio allows you to benefit from changes in both areas.
