The Fed raises rates and the Dutch hold back populism

On 15 March 2017 the US Federal Reserve raised interest rates by a quarter of a point. The same day, elections in the Netherlands gave victory to Mark Rutte over Geert Wilders’s party, which reassured European markets. Two different events coincided on the same day and each had its own economic reading: one was about the price of money; the other, about the political stability of Europe. Understanding each separately helps avoid confusing causes and effects.

The rate rise in the United States confirmed that the US central bank was continuing to withdraw, little by little, the extraordinary support of the crisis years. The Dutch result, for its part, cleared away some of the political uncertainty that had worried investors since the British referendum. Neither event on its own resolved the economic doubts of the moment, but both influenced market sentiment. In economics sentiment matters: it shapes investment and lending decisions.

What raising rates means

The official interest rate is the price of money set by the central bank. When it rises, credit becomes more expensive and savings earn slightly more. A Fed increase signals confidence in the US economy, but also makes dollar financing dearer: companies and families that owe money in that currency, or at a rate linked to it, pay more interest.

The effect is not limited to the United States. As the dollar is the reference currency in a large part of world trade and finance, its interest rates influence currencies and the financing of countries and companies around the world, especially those that owe money in dollars. That is why the Fed’s decisions are followed so closely even from outside the United States. Anyone with debts or income in dollars should follow them with particular attention.

The Dutch relief

After the UK’s decision to leave the EU, there was concern that other countries might follow the same path. The result in the Netherlands eased that worry in the short term, though it did not remove it, as other important elections lay ahead in Europe. Markets read the result as a sign of stability, but they know that politics can change quickly.

This reading is a good illustration of how politics and the economy are connected. An election can change the price of assets within hours, not because it immediately alters the situation of companies, but because it changes the probabilities of the scenarios investors consider possible. When a feared scenario loses weight, sentiment improves; when it gains weight, the opposite happens.

What to review

Companies and families with variable-rate or dollar debts should measure how much a further rise would affect their repayments. A simple exercise is to calculate how much the monthly payment would increase if rates rose by one more point, and to check whether the budget can bear it without strain. Having that figure to hand avoids surprises. It is worth repeating the calculation from time to time, because the terms of the loan and of the markets change.

With it, it is easier to decide calmly whether to renegotiate terms, adjust maturities or fix the rate on part of the debt, always with the advice of the bank or an independent adviser. Anticipating is almost always cheaper than reacting once the change has happened. And on investment, this text is general information and not a recommendation.

Cheap financing does not last for ever; it is worth checking that the plan holds up at higher rates.

This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.