- On 26 September the Fed raised rates again, continuing its path of normalisation.
- On 30 September the US, Mexico and Canada reached a deal to replace NAFTA, which governed their trade.
- A rate rise and a trade pact are two different uncertainties: one remains, the other clears. It is worth following them separately.
On 26 September 2018, the US Federal Reserve raised interest rates again, and on 30 September the United States, Mexico and Canada reached a deal to replace NAFTA, the treaty that governed trade among the three countries. Two pieces of news of very different kinds, one monetary and one commercial, in the same week. Neither resolves companies’ challenges by itself, but both offer valuable information for planning.
Each has its own reading. The rate rise continues a path of normalisation of the price of money in the United States that affects currencies, markets and financing in the rest of the world. The new pact, by contrast, clears an important uncertainty for one of the largest trading zones on the planet. For the business owner, it is worth reading them separately and understanding how each may influence their decisions.
Another rate rise
The Federal Reserve continued on its path of normalisation with a further rise. For those with variable-rate debt or investments sensitive to rates, the direction was clear: money continued to become dearer in the United States, with effects on the dollar and on markets in other countries.
US interest rates have an effect that goes beyond its borders. When they rise, the dollar tends to attract capital, which can put pressure on the currencies of emerging countries and make financing dearer for those who owe money in that currency. They also influence the return on bonds and the value of certain assets. That is why they are followed closely even in economies other than the American one. Anyone with dollar debts, dollar income or investments in US assets feels it more directly.
A new framework for North America
NAFTA, the treaty governing trade among the United States, Mexico and Canada, was to be replaced by a new agreement. Closing the pact cleared the uncertainty over one of the world’s largest trading zones, essential for many supply chains.
North American supply chains are highly integrated: a product may cross borders several times before reaching the final consumer. That integration depends on stable rules on tariffs, origin and customs procedures. Knowing that a replacement agreement exists removes the fear of an abrupt break and allows companies to plan investments and contracts with more confidence, although the specific details require careful analysis. A political agreement only becomes a certainty when its final text is known and ratified.
A reading for business owners
Trade agreements bring stability, and stability makes planning possible. A European company with customers, subsidiaries or suppliers in North America can use the occasion to review which conditions change and how they affect its costs, its customs procedures and its contracts. It is also a good moment to talk to customers and suppliers in the region about possible changes in terms.
A good start is to list the operations that depend on that region and check, with the customs or legal adviser, whether the origin requirements, delivery times or necessary documentation change. In parallel, anyone with variable-rate or dollar debt can review how much a further rise would affect them. The two pieces of news call for different exercises, and it is wise not to confuse them. Mixing the two issues leads to imprecise decisions, while separating them allows clearer action on each.
While some uncertainties clear, others remain: it is wise to follow both separately.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
