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The Federal Reserve Increasing Interest Rates
By admin July 14, 2015

150319_INV_InterestRates

 

Since December 2008 when global financial crisis hit the United States, the Federal Reserve (the Fed) held the benchmark interest rates near zero. Recently, however, the Fed indicated that it would raise rates gradually in a year as the economic growth rate of the United States seems to be rebounding.

In theory, adjusting for the benchmark interest rates of the Fed is a monetary policy that can provoke the economy or cool down economic growth if the growth is too speedy. When the Fed lowers its interest rates, other banks follow its policy primarily because they are required to have certain percentages of reserves in the Fed.

Ordinarily, if the Fed increases the interest rate, most banks also raise their prime rate following the direction the Fed signals. That increase affects the operation of other rates and loans, including mortgage rates, business loans, and consumer loans. Higher interest rates make borrowing harder; therefore, there is a possibility that economic growth is interrupted by making companies hesitant to invest, slowing production levels, and lowering employment rates.

The International Monetary Fund (IMF) is concerned that the Fed is raising rates too quickly. Although the U.S. economic growth is on track as indicated by the reduced unemployment rate, the IMF is anxious that premature optimism can have repercussive effect.

The primary reason hawkish forecasters worry about raising rates this year is the high uncertainty about global economic outlooks. As the IMF explained, the strength of the dollar has been one of the factors impeding more economic growth in the United States. Given that the appreciation of the dollar happens when a domestic economic policy slows to spur economic growth, more appreciation can take place if the Fed raises rates as well as if the economy of the Euro zone topples, possibly triggered by Greece, or Chinese stock markets keep sluggish.

More importantly, raised interest rates will affect real people in the U.S. who usually borrow money to pay for home mortgages, car loans, and even student loans. According to a report from CNN, mortgage applications in 2015 saw a rush in order for applicants to enjoy the low interest rate before it increases at the end of the year.

The wage also can be affected by the Fed’s interest rate. The principal reason the Fed decided to raise rates was the low unemployment rate and the chief of the Fed, Janet Yellen, sees high growth of wage to not be precondition to raise the interest rates. However, when increased rates make borrowing money harder and slow investment, weaker demands for goods and services caused by inactive production and the employment level would lower wage levels as well.

As such, the Fed raising interest rates can have extensive effects on the U.S. economy, especially at the moment when various uncertain economic prospects are prevalent globally. Therefore, the cautious, including the IMF, say that the Fed needs to be more careful and see more signs – beyond employment rates – to assess whether to raise or keep its interest rates.

For more information:

http://www.nytimes.com/2015/06/18/business/economy/federal-reserve-interest-rates-yellen.html?action=click&contentCollection=Economy&module=RelatedCoverage&region=Marginalia&pgtype=article

http://www.businessinsider.com/federal-reserve-window-to-raise-rates-2015-4

http://www.nytimes.com/2015/06/05/business/economy/imf-recommends-fed-delay-raising-interest-rates.html?action=click&contentCollection=Economy&module=RelatedCoverage&region=Marginalia&pgtype=article

http://money.cnn.com/2015/03/19/news/economy/federal-reserve-statement-interest-rates/

 


Thanks for sharing !


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