What interest rates mean for US markets

This article is part of
Guide to US Equities

What interest rates mean for US markets

Just over a year ago the Federal Reserve was carrying out a series of interest rate hikes.

That quickly changed early last year, when it started loosening policy again.

This article will investigate the implications of this shift for advisers.

Central bankers’ declarations are often as influential as their actions, if not more.

Mario Draghi famously helped stabilise a dire situation in Europe when, in the midst of the region’s 2012 debt crisis, he promised to do “whatever it takes” to preserve its shared currency.

Federal Reserve

Federal Reserve chairman Jerome Powell has learned a similar lesson about the power of words, to his cost.

In October 2018, as the Fed moved to a path of rising rates, Mr Powell declared that monetary policy was “far from neutral” – a statement some took to suggest that much more aggressive, or sustained, monetary tightening was on the way.

Though not the only suspected cause of the volatility, his words and actions have been linked by some to the fourth quarter sell-off that shook markets: all equity indices suffered severe falls in the final months of the year.

Come the end of 2019, and Mr Powell has been striking a much more conciliatory tone over the past year.

Amid challenges such as slowing global growth the Fed has in fact been cutting rates in 2019, with Mr Powell also softening his rhetoric about the path of rates.

Current conditions point to more of the same in 2020.

Though relations have improved lately, the ups and downs of the US/China trade war could create ripples of uncertainty for the world’s largest economy.

The lukewarm state of US and global economic growth will also most likely make the Fed unenthusiastic about raising rates, as will the political climate: election years are generally not a good time to be tightening monetary policy.

If anything, the Fed could ease monetary policy further if problems arise in the economy.

In a recent outlook paper the cross-asset research team at Lyxor noted: “We anticipate that major central banks in developed markets will maintain extremely loose monetary policy conditions to spur economic growth.

“We do not expect much additional easing though we do not rule out further rate cuts from the Bank of England following Brexit and from the Fed, should the US economy falter.”

Atlantic House Fund Management head of equities Fahad Hassan goes further, suggesting that US rate cuts look likely.

“With an economy close to full employment, the US government is running a deficit and Trump is putting pressure on the Fed to cut rates further,” he says.

Impact on US equities

2019, the year that saw the Fed revert back to looser monetary policy, was extremely lucrative for US equities, with the S&P 500 racking up gains of more than 20 per cent in sterling terms.