Why the US is setting our interest rate agenda

Just like the Bank of England's announcement last week, yesterday's US rate cut had been widely anticipated by analysts and private investors alike. It is the fifth time this year the Federal Reserve Bank has cut rates in an effort to keep the economy moving forward and put a halt to a domestic, and consequently global, recession. Even the European Central Bank, which had come under criticism for failing to cut rates and consequently impeding the race against recession, made a shock rate cut announcement last week.

In the same way that a Bank of England base rate cut means bad news for UK savers and good news for borrowers, changes to the US base rate have an immediate ripple effect on the country's economy in general. But the US announcement is not just significant for American citizens, it is also one of the most anticipated trading events across the globe.

There is a significant correlation between movements in the US stock market and movements in the market here, as well as abroad. For one thing, the US stock market is the biggest in the world and many of the large companies listed on it operate on a global scale, so what happens on home turf has a wider impact.

Lower rates in the US generally mean good news for UK markets. They not only raise hopes of a recovery in earnings growth but they also encourage investors to move from less risky investments such as cash and gilts and back into equities.

At the same time, sentiment plays a part, as many UK investors put a lot of stock in what happens in the US, realising that UK trends often take their lead from across the water. In other words, if the US sneezes, then we'll all catch a cold.

Coupled with this, the head of the US Federal Bank, Alan Greenspan, has taken on an almost godlike status in the minds of many investors. Dubbed by some as the single most powerful man in the world, or 'Alan the Great', every word he utters is scrutinized by analysts across the world, meaning real consequences for investors everywhere and world economies.

Greenspan's influence can be also be felt by the greater significance many investors and analysts attach to his long-term outlook than to today's announcement. Many are more interested in any indication by the Fed that its rate slashing spree may be drawing to a end - markets are more likely to react positively to this sort of indication than on a single rate cut decision.

Even for those who don't dabble in stocks and shares, the effect of changes in the US economy is still likely to be felt - savings, pensions and insurance policies all have a stake in the market. So, while we might like to think ourselves immune from the American touch when it comes to certain aspects of popular culture, the very real effects of the US economy on our everyday lives cannot be so easily dismissed.