The FOMC meets next week to decide its policy on interest rates. The question is whether they will hike rates (probably yes). If they do it will be the first rate increase for nine years (the last rate increase was June 2006).
The question for UK investors is what might be the effect on UK equities if the FOMC decides to increase rates next week?
The following chart compares the FTSE All-Share Index with the effective federal funds rate for the period 1954-2006. The FTSE All-Share Index is plotted with a log scale (more appropriate for long periods such as this). The vertical grey bars highlight nine times when interest rates were increased after periods of monetary loosening.
From the chart it can be seen that in six cases the UK market rose following a turn in the monetary policy cycle when rates were first increased; and in three cases the UK market fell afterwards.
However, there has been no precedent for what happens after nine years of a zero interest rate policy.
More articles on the FOMC.