Stock Market 101: Holding Interest Rates & What it Means

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Central banks decide to hold interest rates in an attempt to keep a lid on growth.

Interest rates have been the talk of the town in the UK and the US over the past year or so, and for good reason.

Central bankers in the UK and the US recently met and announced immediate plans for holding interest rates. You might be wondering what the recent announcements mean for the stock market.

What’s happening with interest rates?

In the US, on 31 January 2024, the Federal Reserve decided to hold the Fed Funds rate at the same level (5.25% to 5.5%) – as was expected.

However, US policymakers used an Uno reverse card to undo previous comments made about bringing rates down sooner rather than later.

Here in the UK, the Bank of England also made the decision to hold rates where they are at 5.25% (for the 4th time in a row). Although rate cuts might happen in 2024, we don’t yet have a timeline of what that’s going to look like.

What does this mean for the US stock market?

Major stock market indices like the S&P 500 received a decent boost following past comments that rates would be coming down in 2024. The change in recent language has led to a brief stall in the upwards progress of stocks.

Choosing to hold rates isn’t ideal, but there’s no need for doom and gloom. It’s likely that the S&P 500 could stay relatively flat until there’s more immediate optimism about rates coming down. But, it’s more just a case of delayed gratification.

The idea of higher rates is to dampen inflation (and growth). Lowering this barrier will hopefully lead to continued growth in US stocks, but we may have to wait a little bit longer.

How is the UK stock market affected?

In the UK, we have a lot less growth-focused companies (like tech stocks), and higher interest rates aren’t as damaging to the performance of shares. The higher rates actually benefit value stocks (something we have plenty of).

The UK’s flagship index, the FTSE 100, has also remained flat since the (expected) announcement to hold rates where they are.

If and when rates do drop (hopefully at some point in 2024), it’s likely to have a much more muted effect on the UK stock market compared to the US.

It should help with the growth of UK shares, but we have a pattern of underperforming over the last few years, and fingers will be crossed that lower rates give shares a much-needed push.

About the author

George Sweeney DipFA is a deputy editor at Finder.com, specialising in investing. He has previously written for The Motley Fool UK, Nasdaq, Freetrade, Investing in the Web, MoneyMagpie, and Online Mortgage Advisor. George is a qualified financial adviser and is regularly quoted in the national media about investing and personal finance.

This article originally appeared on finder.com/uk and was syndicated by Mediafeed.org.

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