US Fed raises rates and hints at three more to come

Helal Miah, investment research analyst at The Share Centre, explains what the latest US interest rate rise means for investors.

US Fed raises rates and hints at three more to come

Last night the US Federal Reserve did exactly what had been anticipated by raising interest rates to a target range of 0.5-0.75%.

This decision in itself did not cause much of a reaction in the financial markets since it was priced in. However, Janet Yellen’s expectations for the future path of interest rates was unanticipated and a surprise for the markets.

The Chair of the Board of Governors of the Federal Reserve System forecast a faster pace of tightening in the coming year, as a result of which the major US indices pulled back a little.

A clearer reaction was seen in the currency and bond markets as the US dollar significantly appreciated against major currency peers. Sterling dropped back close to $1.25 from $1.27 at the time of the statement and yields on US Treasury bonds rose across all maturities.

The path of interest rises will be higher because of the good health of the US economy and this should be welcomed by the markets after nearly a decade since the start of the financial crisis and still low interest rates.

With good GDP growth and record unemployment levels, it is natural for central bankers to focus on the likelihood of inflation beginning to creep up, which will be helped along by a recovery in oil and commodity prices. However, these interest rate rises will be measured according to the prevailing economic conditions as the year progresses.

Should for some reason economic growth stall, or the rate of inflation slows, then it is unlikely that we will have three interest rate rises during 2017 as the Federal Reserve foresees.

We would suggest that there are too many uncertainties to warrant that many in 2017. Some may recall that this time last year, the Federal Reserve predicted four rate rises during 2016. We were sceptical and expected fewer and in the end we just got the one.

The other factor to consider is Donald Trump’s pledge on infrastructure spending. This will be a boost to growth and inflation. However, they will take time to be effective so the Fed’s interest rate rise should be weighted towards the back end of 2017.

Overall, as investors based in the UK, we should welcome this decision as a signal that a recovering US economy will have positive impacts on the rest of the world and the UK economy.

Given that UK interest rates are low and the Bank of England is unlikely to make any changes today, we believe that the equity market still represents the most attractive asset class for income and capital growth.

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