Powell nominated to the Fed; Bank of England raises rates

On 2 November 2017 Donald Trump nominated Jerome Powell as chair of the Federal Reserve and the Bank of England raised interest rates for the first time in more than ten years. Two monetary policy decisions coincided on the same day and both pointed in a similar direction: that of an environment of progressively less cheap money in the main advanced economies.

Market attention was split between the two items. The nomination of the Fed chair matters because the orientation of the monetary policy of the world’s largest economy depends to a large extent on it; the British rise, because it broke with a long period of minimal rates in a country that also faces the uncertainty of Brexit. Together, they sketch the context in which many financial decisions will be taken. For anyone with debts or savings, it is an invitation to review assumptions that may have been made at a different point in the cycle.

A key nomination

The Fed chair is one of the figures with the most influence in global financial markets, because decisions affect interest rates and the value of the dollar worldwide. For that reason the appointment is followed closely, looking for clues about continuity or a change of direction. A chair may keep the line of a predecessor or introduce nuances that alter expectations.

Fed decisions are not taken by one person but by a committee, so the individual weight of the chair has limits. Even so, communication and style matter a great deal, because markets interpret every word. For the saver or the business owner, the useful reading is not to predict what will be done but to understand that the change of chair is one more factor in an environment of rates that tends to normalise. Institutions change faces, but the general trend matters more than any one name.

A British rate rise

That the Bank of England raised rates for the first time in more than ten years reflects a shift in the monetary policy of a country that was also facing the uncertainty of Brexit. For those with debts, income or investments in pounds, it means a significant change in the cost of money. Variable-rate loans become dearer and savings in pounds tend to earn somewhat more.

The decision also influences the currency, although its effects depend on many factors that are not limited to interest rates. For a company with operations in the United Kingdom, the change affects local financing, prices and the value of cash flows in pounds. It is worth bearing in mind when planning budgets and negotiating contracts, especially long-term ones. A currency and rates that move call for flexible forecasts.

What to watch

The coordinated move by the major central banks towards a less expansionary policy is a trend that affects loans, currencies and financial assets. Reviewing periodically the structure of debt and the make-up of a portfolio makes it possible to adapt to the changing environment. With rates rising, it is worth knowing what part of the debt is variable and what the maturity schedule is.

The point is not to guess the central banks’ next move, but to ensure that no important decision depends on rates staying at current levels. A sound plan withstands different scenarios, and one review a year, with an adviser’s help, is usually enough. This text is general information and not investment advice.

Central banks set the price of money; it pays to follow them, not to guess them.

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