Finance, The Fed, and you: personal money in 2016

The Federal Reserve’s decision to increase America interest rates by just 0.25% for the first time in a decade might seem like a tiny pebble to throw into the financial pool of the world’s economy, but the ripples will spread a long way, and have implications for us all, as our blogging partner Stuart Pearcey explains in this look forward to 2016.

When the world fell off a financial cliff in 2008 we suggested privately that things would eventually get back to normal, but that the new ‘normal’ would be different from the one with which we’d been familiar and comfortable.

And so it has proved; America’s first interest rate rise for the first time in a decade is a recognition that their economy is feeling a sustained recovery – but almost simultaneously manufacture of steel plate at Scunthorpe’s steelworks, once amongst the largest in Europe, came to an end after almost 90 years.

Economic factors lie behind both of these milestones of 2015. America’s rate rise is indicative of a strengthening labour market, making the Fed believe a sustainable recovery is happening; the UK labour market is similarly upbeat, with the latest figures showing unemployment having dropped to pre-recession levels for the first time. However, here’s the rub: the jobs aren’t in the same industries as they were before – witness that plate mill closure, costing several hundred jobs, and a similar sad story in the same industry on Teesside, from where more than 1,500 manufacturing jobs evaporated only weeks earlier.

Factors beyond their control
Personal Money ManagementBoth took a pummeling from factors outside their control, like expensive energy, tax burdens, and too much steel chasing too few customers as the rate of China’s economic growth eased and its ‘bargain price’ exports increased.

This decision by The Fed, led by Chair Janet Yellen, pictured, hadn’t been unexpected, and will no doubt trigger conditions for a similar rise in the UK eventually ¬– but not yet. It’s unlikely to come before Q3 this year at the earliest. John Longworth, Director General of the British Chambers of Commerce, says interest rates will need to rise at some point, but adds: “Conditions don’t yet demand an increase here, persistently low rates add to the debt problem in an already unbalanced economy. The longer we wait the greater potential for impact when it comes.”

The greatest stable sustainability will come from ‘baby step’ rate rises; small increments at measured intervals, allowing business and industry to absorb and deal with them without upsetting the delicate state of any recovery.

Growing positivity
I believe its happening; I detect a growing feeling positivity, and an increasing proportion of the media releases passing over my screen are from companies talking about their plans for growth. New growth often means new premises, which will please investors. As Neil Blake, Head of EMEA & UK Research at CBRE, says: “Interest rates (in America) are rising because policy makers believe a sustainable recovery has set in, not just in the USA but in the rest of the western world too. This translates into rental growth in many European property markets, which will actually boost investor confidence. As long as interest rate rises remain gradual, any impact on property pricing will be muted, especially if rents are rising.”

Closer to home
Money ManagementAmongst individuals, there is still a nervousness about the future, even though research shows that financial pressures on households are easing and there’s a feeling that job security is better than it was. This is a cue to stop being concerned about the wider economy, but to focus more closely on factors that can be controlled by individuals – and businesses, for that matter – rather than those that can’t.

And for individuals, that has to be the continuing roll-out of auto-enrolment to company pension schemes. Does this mean the end of the State Pension at some unspecified point in the future? Who knows? Nothing’s been said, but what if it were to happen? What could can you do about it? The answer is ‘nothing, instantly’. However, building a personal career pension pot built over a lot of years has to be a good idea, as Andrew Storey, Technical Sales Director at eValue, advises: “People need to think about how they can guarantee their future household lifestyle. This means saving as much as possible into pension pots.

Want to have £100,000?
Even a small increase in contributions now will be of massive help in the long term, as savings add up and gain compound interest.  For example, at a moderate investment growth, saving just £10 a week from the age of 25 could create a pension pot of around £100,000 by 65.” Any changes to interest rates, which will come eventually, can only serve to enhance those figures further.

Is saving £10 a week too big ask? With the ultimate prospect of an interest rate rise and consequent better returns on investment, I’d say not. Shopping for groceries differently could save it. Changing utility supplier could save it. Using Solo Expenses to help with expense management will highlight where your money is going, and show your trimmable spending spikes, giving you the money to put away. It’s worth starting now, as Andrew Storey suggests. The ripples from the Fed’s pebble, mentioned at the top of this blog, will reach your corner of the pond eventually, and no-one but you can prepare your personal economy to make the most of it.

Official Federal Reserve picture of Janet Yellen: Wikipedia.