Powell’s first rate rise

On 21 March 2018, the US Federal Reserve, at the first meeting chaired by Jerome Powell, raised interest rates by a quarter of a point. It was one more step on the gradual path of increases the central bank had embarked on after years of exceptionally low rates. That same week the Cambridge Analytica and Facebook scandal also broke, sinking technology stocks.

Two pieces of news of very different kinds coincided within a few days and shaped the mood of the markets. One, on monetary policy, affects the price of money across the world. The other, about reputation and the use of personal data, is a reminder that customer trust is an asset that can be lost quickly. Both offer practical lessons for anyone running a company or managing family wealth. They are best treated separately, because they call for different decisions, but without forgetting that both concern risks that are better managed in advance.

Normalising rates

After years of exceptionally low rates, the Federal Reserve continued to raise them gradually. A rate rise makes credit dearer and, in general, moderates the pace of the economy; central banks apply it when they judge that the recovery allows it. The key word is “gradual”: the aim is to withdraw the stimulus without braking activity abruptly, which is why each decision is announced in advance and explained in detail.

The price of money feeds through to almost everything: to mortgages and loans at variable interest, to the return on deposits, to the value of bonds and to a company’s decision whether or not to borrow in order to invest. A rise of a quarter of a point seems small, but what matters is the direction: it signals that money will be somewhat dearer in the coming years, and anyone with debt should keep that in mind. The same applies to savers: deposits and other fixed-income products tend to adjust their return when rates rise, though with a lag and not always to the same extent.

A blow to tech

The Cambridge Analytica and Facebook scandal, linked to the use of user data, sent the big technology companies lower on the stock market. It was a reminder that reputation and the handling of personal data have direct economic consequences for companies.

A company whose business depends on the trust of its users is especially vulnerable to this kind of news. Customers hand over their data expecting it to be used for a specific purpose and to be protected; if they find out otherwise, the relationship suffers and investors price it in immediately. The lesson reaches companies of any size: customer data is a responsibility before it is a resource. And protecting that trust requires concrete procedures, not just good intentions.

What to review

For anyone with variable-rate debt, a rising-rate environment is a reason to review the cost of financing. And for any company that handles customer data, the episode is an invitation to go over how that data is obtained, stored and protected. It is not a bureaucratic exercise: it is the basis for responding quickly if one day it is necessary to explain to a customer what was done with their information.

In practice, it helps to know which part of one’s debts is linked to a variable rate, to calculate how much the instalment would rise with a larger increase and to talk to the lender about the alternatives available. In parallel, it is worth setting down in writing what data is collected, with what permission, who has access to it and for how long it is kept. A financial adviser and a legal one can help organise both. Doing so calmly and in writing usually avoids hasty decisions when the environment becomes turbulent.

Interest rates and customer trust are two factors worth watching at the same time.

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