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Interest rates

The US Federal Reserve interest rate decision: Good or bad news for investors?

Nathan Lear
Partner/Private Client Adviser
23 Mar 2016

The US Federal Reserve announced last week that it would leave the official interest rate unchanged at between 0.25 and 0.50 per cent. Perhaps more significantly, it also changed its positioning on future increase forecasts. Although it still forecasts future interest rate hikes, it anticipates these increases will be slower than when first indicated in December 2015. Due to global slowdown and instability across global markets, it indicated we would only likely see two rate hikes in 2016, rather than four.

The US Federal Reserve has kept interest rates at close to zero for seven years, and has injected $US4 trillion into the economy over this period. This creates a challenge for Janet Yellen, US Federal Chair, as she must balance her messaging to stakeholders to send the right signals: it’s important for her to appear somewhat positive in her comments regarding the economy but ensure she does not go as far to “spook” investment markets.  

How did both Australia and global investment markets react to the news?

Global investment markets reacted positively. The US Dow Jones and the Australian All Ordinaries indices were both stronger.

The Australian dollar lifted to an eight-month high to approximately US76 cents, which was supported by the improvement in commodity prices, particularly iron ore.

What does US Reserve decision mean for markets and high net worth individuals?

So was the decision good or bad news? Many may argue that it is not a good sign given the decision to slow future interest rate increases is due to weaker global economic conditions. This is true, however investment markets are generally more supportive of lower interest rates. Slower interest rate increases is a positive for equity markets as essentially it means there is more money in the system to find its way into the market.

US interest rate decisions can create short term share market volatility, driving it up or down. However, clients of Hewison Private Wealth can rest assured knowing that we continue to manage their portfolios according to a long term investment strategy. This means that while we always keep a pulse on what’s happening in the market, we look long term when making individual investment decisions. Short-term events should not impact a client’s overall strategy.

The information provided above is general information only and individuals should seek specialised advice from a qualified financial adviser.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.