“Don’t fight the Fed!” is one of the most useful unwritten rules of investment. When the US Federal Reserve is in a sustained period of interest rate rises, global asset prices struggle and often fall. The Fed raised its prime rate in June and the Governor of the Bank of England made it clear we are likely to follow suit sometime in 2017.
If the initial small rate rises are followed by larger ones, this will be very interesting and I for one will be watching things closely. The Western economies will be rebalanced, with savers getting a higher return and borrowers having to rein things in. The speculative flows into risky stocks, land and property will hit the buffers.
In the real economy there will be real pain. It will take time for mortgage rates to rise, but if they do it will be a shock to the system. Younger home owners have never known any interest rate higher than near zero, the idea that rates can move against you and leave you with reduced disposable income will be very unwelcome.
Right now the scenario in which base rates rise by more than 2 per cent in this cycle is a remote prospect. But because it is one which will bring with it structural change, as with the crash of 2008 in the global banking system, it will pay to be ready for it.
Friday 24 November 2017