City & Business: No need for panic over US increase in interest rates
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Your support makes all the difference.DOES the Fed's decision to raise interest rates for the first time in five years mark the start of a full-scale crash in world equity markets, or is what occurred on Wall Street on Friday night - a fall of nearly 100 points in the Dow Industrial Average - no more than a large hiccup, a short-term correction?
Traditional wisdom would have you believe that a turn in the interest rate cycle spells the end of a prolonged bull market. That's certainly what the pessimists were emphasising as Alan Greenspan, chairman of the Federal Reserve Board, marked a sea change in policy by pushing short-term interest rates higher.
The move was not entirely without warning. Mr Greenspan had foreshadowed the tightening earlier in the week in a congressional testimony. In any case, it was well known that the Fed would want to make a display of its determination to beat inflation once and for all with a rise in interest rates at some stage. Nobody, however, had expected it quite so soon.
But though the move is of huge symbolic and psychological importance, it's hardly likely to change the investment perspective dramatically. One quarter of a percentage point is going to make little difference to the relative attractions of bonds, cash and equities. For the time being, the outlook for interest rates in Europe is still for more cuts, regardless of what's happening in the US. In any case, equity markets are in such sunny disposition that they seem capable of receiving almost anything as good news, even a reversal of the low-interest-rate environment that has been driving them sky high for the last year. London is bound to follow Wall Street down when it opens tomorrow, but a crash looks unlikely.
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