Fed Rise Triggers Nervy Markets

What does the US interest rate rise mean for the markets? Jerome Powell, the new chairman of the United States Federal Reserve, certainly decided to make a splash during his first month in the job. He announced that the Federal Reserve will be increasing interest rates by 25 basis points to between 1.5% and 1.75%.

However, he did not make any major changes to the Fed’s outlook for the rest of the year, signalling that the Reserve still expects there to be three 25 basis points rises over the course of 2018.

Market reaction

The American markets initially reacted negatively to the news. A rise in interest rates could restrict the flow of money in the economy and cause consumers to reconsider their household expenditure.

This could cause a slight slowdown in consumer spending across America, which has been a key driver of economic growth since the end of the Great Recession. Increased mortgage payments and credit card bills could further increase the woes being experienced by American retailers, many of whom have downsized and closed outlets over the last two or three years.

NASDAQ Live Chart

Open Chart in New Window

Government reaction

The move could also spell trouble for President Trump’s tax and spending plans if they force up the rates at which the American government is able to borrow money. Trump’s economic stimulus plans involve running a substantial deficit over the coming years and even a small increase in interest rates could quickly make his spending plans unsustainable.

It could also mean that Congress is locked in Debt Ceiling related debates every couple of months, making it much harder for the President to put his legislative agenda into action.

Other factors

There is a slight chance that other clouds on the horizon coupled with this interest decision could quickly lead to a perfect storm that disrupts US economic growth. President Trump has announced more sanctions, which could slam the brakes on the type of international trade that has helped to drive American growth over the last few years.

On the other hand, it could be argued that the US economy is in the best position to withstand these types of shocks than it has been for over a decade.