The first signs of seismic activity were recorded in Washington on Friday afternoon, when, for the first time in five years, the Federal Reserve raised interest rates, albeit by a smidgen. It was a prudent increase in the price of lending, a gentle restatement of the bank's commitment to controlling inflation. But it spoke volumes to investors. Money, they have been warned, will not go on getting ever cheaper, and savings may soon be a better medium-term bet than shares. Stock markets duly registered the jolt yesterday: from now on, shares will have to be powered by rising profits rather than the lack of attractiveness of cash.
Some investors may be tempted to sell their shares and return to the market only after several years, by which time the Big One might have taken place. But most people will take comfort from the prospect of low inflation and slow growth in the United States, combined with a likely further cut in interest rates in Europe. Others still, while worried at the prospects for US equities, may aim to stay in the market until just before a crash and gain whatever profit remains to be made. But prudence dictates that individuals should at least spread their risk.
As for the British economy, the beginning of the end to the boom in share prices has only modest implications. The small rise in US interest rates will influence European monetary policy to some extent. The Germans, already lukewarm about cutting their own interest rates, face a difficult choice between supporting their domestic economy and supporting their currency. But European rates are bound to edge downwards eventually. In any case, Britain is no longer bound by the exchange rate mechanism and can tolerate a weakening in sterling as a result of lower interest rates. The Chancellor, wary that April's tax increases might stifle recovery, still retains the option to authorise an additional cut.
In short, economic growth should remain on course - but shareholders would be wise to take heed of that warning tremor.Reuse content