US Federal Reserve Keep Interest Rate Unchanged: Will This Effect UK Savers?

The US Federal Reserve met on 28th October to discuss raising interest rates. At gpfm our Hertfordshire financial advisors keep a close eye on what’s going on in the States’ economy, knowing how much of an impact changes in that market could have on the UK money market.

While some predicted that members of the Committee would adjust the rock-bottom current interest rate, the meeting ended with the decision to keep the rate unchanged. What does this mean, and what impact does it have on UK savers? Here our experts review the details.

The Impact of a Low Interest Rate

The economic crash of 2007-8 was a result of global economic forces and the collapse of the US sub-prime mortgage market. With the economy at rock bottom, economists took drastic measures to make growing the economy again as easy as possible.

One fundamental measure was lowering the interest rate, allowing banks to borrow money from the central bank at a next-to-nothing rate. In turn, this meant that businesses and private individuals could also borrow money to invest into their projects at a low rate. The aim being that this investment would get the economy growing again and create stability in the market.

Initial Non-Consensus among Board Members

Before the meeting on the 28th, the Federal Reserve’s Board members were explaining that the interest rates were going to rise. However, there was a lack of consensus about when that would happen.

For example, one member of the Board, Lael Brainard, had commented that she believes raising the rate would damage the recovery at this point, and that the Federal Reserve should continue “nurturing” the economy. Meanwhile, others on the Board were more optimistic about a hike, including Jeffrey Lacker, President of the Richmond Federation, and John Williams, the San Francisco Federation President, who both suspected that a gradual rise would be economically valuable.

However, in a statement following the meeting, the Board revealed their decision to maintain the existing low interest rate:

“The Committee continues to see the risks to the outlook for economic activity and the labour market as nearly balanced, but is monitoring global economic and financial developments,” the statement added.

If the Board wishes to increase the interest rate this year, they now have one more opportunity to do so – at its next meeting in December.

The Impact on US and UK Markets

If the interest rate had increased slightly, this would likely have impacted the US markets. In some ways for consumers, the hikes would have been positive, as bank account interest rates may have seen a small improvement. Meanwhile, loans on the domestic market might also have seen interest repayments go up, meaning an increase in rates for credit cards and mortgage repayments.

Of course, the Board voted against this. However, the lack of a rate hike is also significant for both the US economy and UK savers.

At GPFM, our Hertfordshire financial advisors believe these actions may have had a small knock-on effect on the UK economy. While there’s no formal link between the US and UK interest rates, it’s expected that the Bank of England will raise its own rate soon. The Board of the BoE is likely looking for indicators from around the globe that the wider economy is improving. If the Federation had raised its interest rate, this would have been a strong indicator for the BoE to shift.

If the BoE decides to hike its own interest rates, there would be similar repercussions as those predicted for the US. For savers, investors and businesses in the UK, this would have a large impact.

Our Financial Planners will be paying close attention to the proceedings. If you’d like immediate news notifications from our experts, we recommend following us on Twitter. If you’d like to discuss how these updates might impact your personal or corporate finances, call one of our experts on 01992 500261.