US rate rise ramifications

The US economic situation is different in many respects from the UK. It is partially driven by increased demand rather than just commodity prices, Brexit and labour shortages. Hence an increase in interest rates is more justified as they could have more of an impact in bringing inflation down. This is not so much the case in the UK where economic demand is collapsing already, as evident in the recent UK GDP numbers. So yes, the UK will increase rates to try its best to rein in inflation but it will have less of an impact. Given the state of the UK economy, and the falling currency interest rates will rise less than the US. The market expects rates to peak around 2.5%, whereas in the US you may see them exceed this level.

The US is leading the way on taking action against rampant inflation, which is now a global problem. Many say it has come a little late. It is likely that the UK will now follow suit, and that isn't a bad thing. The biggest threat to the UK economy, and investors, is high inflation and low growth, so action is required. UK inflation has proven to be more stubborn than initially hoped and there is little to shelter investors and savers from value erosion. The Bank of England has the unenviable task of taming inflation through interest rate rises, without choking off the fragile growth in the UK economy that is so badly needed after the ravages of COVID.

In the early 1980s, Paul Volcker had the guts to raise interest rates to finally throttle high US inflation. Jerome Powell, so far, is following suit. Hopefully, the Bank of England will do likewise. The poisonous era of ultra-cheap money must come to an end. Overinflated asset prices, specifically property, need a serious readjustment. A return to a near "normal" base rate would be the start. Bring it on and bring it on now.

The predictions were that the UK base rate would reach 2% by the end of year and the move in the US firms up that prediction. This is another affirmation of the sign of hard times ahead.

The nature of rate rises across the pond is likely to be mirrored in the UK, in order to support the Pound. People need to tighten their pockets as life is about to get even more expensive, which is saying something given the current level of inflation.

Having watched the news conference, Chairman Powell is arrogant and foolish. He almost explicitly stated he wants more unemployment to help curb inflation and this shows that the pursuit of GDP growth at any cost knows no bounds. Economics is broken and the difference between the have's and the have not's will grow wider, not contract, which is the outcome that policymakers and people in power say they are after. The era of low rates is over for the next few years, but they will likely start cutting rates to stimulate growth again once they have killed it by the end of 2022. Let's hope we do not get a liquidity crisis like 2008 now they are squeezing it out of the system.

The Federal Reserve's 0.75% rate rise backs the Bank of England into a corner, particularly as further large rate increases are expected by the Fed over the next couple of months. The pound is likely to fall, further stoking inflationary pressures, unless the Bank of England increases the base rate significantly. The standard 0.25% increases may not cut it anymore, and it's possible we'll see a 0.5% base rate hike today. Time to batten down the hatches.