Could A US Rate Hike Actually Be Good News For THE FTSE 100?

Stock markets worldwide, the FTSE 100 included, have been trembling in anticipation of the first upward move in US interest rates for so long that it may actually come as a relief when the worst happens. Because the worst, a rise in 25 basis points to a heady 0.5%, won’t be anywhere near as terrible as everybody has been led to believe.

After all, 0.5% is the UK base rate, which I have been airily describing for the last 80 months as “rock bottom”. That is hardly the end of the world. In fact, I’m hoping it will be the reverse, and it will mark the beginning of the world, a normalised world. Rock bottom interest rates (there I go again) may have saved the world from financial collapse in 2009, and have certainly helped power stock markets forward ever since. But they have done almost as much harm as good, destroying prudent savers, inflating asset bubbles, and speeding up the transfer of wealth from the poor to the super-rich.

Green Isn’t Good

The sooner rock-bottom rates become a historical footnote, the better. With the average home in London — the average — costing £513,000, according to the Office for National Statistics, too much damage has been done. It has also been distorting for investor behaviour. The trend began in 1987 with the so-called “Greenspan put” when the former US Federal Reserve chairman made it clear that every time stock markets were imperilled he would save the day by slashing rates.

The response to every new crisis, whether the technology crash, 9/11 attacks or credit crunch, was to slash rates to fresh lows. The 30-year bond bubble is still blowing as a result. Many still say the economy can’t take higher rates. Some point to the “taper tantrum” in the summer of 2013, when US Treasury yields soared after then Fed chairman Ben Bernanke talked of winding down QE. Tantrum was the right word, in retrospect. It never developed into a full-blown shouting match. Most investors can barely remember it.

Happy Hawks

As markets moved towards accepting the fact of a December rate hike, a strange thing happened. They steadied themselves. Some traders even appear to be looking forward to it. There are worries about the impact on emerging markets, as the subsequent drop in their currencies will make it harder to service their US dollar-denominated debts, but others are quite sanguine, and so am I.

If the Fed raises rates, it will signal that Janet Yellen et al believe the US can take it. As New York Fed President Dudley recently confirmed, a hawkish move by the Fed would be a show of confidence in the economy. Colin Cieszynski, chief market strategist at CMC Markets, has crunched some figures to shows that a hawkish Fed in December has been good for markets, with stocks performing better when it hiked rates rather than cut them. He says: “A decision to raise interest rates could in fact boost optimism about economic and earnings prospects for 2016.”

I’m hoping that the Fed will hike rates this week, to be followed by a Santa rally as markets realise that it wasn’t end of the world after all.

Who's afraid of rising interest rates? Not me.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.