US interest rate decisions – what next?

Oct 12, 2015 | Tony Byrne's View

You cannot have missed the media coverage of the Fed’s decision not to raise interest rates in the USA. If on 17th September they had decided to increase rates, it would have been the first time in 11 years that their rates had risen, against 6 years here in the UK.

We all know the adage “America sneezes and the world catches a cold”, and if the Fed had increased interest rates the rest of the world would certainly be more than a little under the weather now. But why is that and what does it mean for us? Well, it seems the environment in the USA would be ripe for interest rate rises – unemployment is low at just 5.1%, which usually means that wage inflation occurs, consumers spend more, which increases demand and contributes to inflation. Interest rates then rise to curb inflation. However, in the USA the labour workforce is only 62% of the overall population, which means there are plenty of workers available for gainful employment, so employers are not incentivised to increase wages to retain staff. This contributed to the Fed’s decision to retain rates at their historically low level. In addition, many struggling emerging economies, such as China and Brazil, have debt lodged with the US Treasury, so an increase in interest rates would mean their debt servicing costs would increase, rocking their economies, and their recovery and growth. This would have a knock-on effect on global growth.

What does this mean for investors? Well, when the Fed does decide to increase interest rates (which could be in October or December), US investments will be affected – the last three interest rate rises saw US investments fall initially, but recover just a few months later. Going forward, we should expect investment volatility for the USA and other parts of the world in the coming months.

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