Last week, the chair of The US Federal Reserve, Janet Yellen, announced that the central bank voted unanimously to raise interest rates to a target range of 0.5% to 0.75%, up from the previous target of 0.25% to 0.5%. Citing stronger economic growth and declining unemployment rates, this is the second time that the Fed has raised rates in 10 years – the first being a year ago. Shortly after the interest rate decision was announced, the dollar rose against the euro and the pound, and US Treasury yields climbed after policymakers upgraded their growth and interest rate forecasts. The stock market also welcomed the news, although the potential for a rate rise was widely expected.
In her statement, Janet Yellen also added that the rise was only a “modest shift” and that the US economy needs gradual increases in the short term given that the country’s economic outlook remains highly uncertain despite signs of economic recovery observed in recent data on consumer confidence, jobs, house prices and growth in manufacturing and services. Yellen puts this uncertainty down to the election of Donald Trump and the policy changes that he may bring, as well as the effect of these changes on the economy. The Federal Open Market Committee, which sets interest rates, expects three more gradual rate rises next year rather than the two that were predicted back in September. In contrast, the Bank of England has voted unanimously to keep the UK's main interest rate at a record low of 0.25%.
Instead of worrying about lingering uncertainty, our view is that long-term investors are best served spending their time finding strong companies that are not over-valued and are run by a good management team capable of navigating through a difficult economic background to generate attractive returns through the cycle.
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