The Fed rate. What will be the increase in the rate of the Fed?

The Federal Reserve System of the United States of America obliges any bank of America to form a certain amount of monetary reserves. They are needed to conduct transactions with customers. This is necessary in case if the majority of customers at once will want to withdraw all their deposits. In this case, a bank financial institution may simply not be enough, and then, most likely, there will be another banking crisis. It is because of this that the FRS establishes certain limits to the amount of mandatory reserves, the size of which is affected by the rate of the Fed.

What is the Federal Reserve's discount rate

Every day banks carry out a huge number of transactions, and each of them tries to increase their volume for growth of the extracted profit. Sometimes customers without warning come and take a large amount of money, resulting in the level of required reserves of the financial institution is reduced and ceases to comply with the instructions of the Fed. This in the future will cause the bank a lot of problems.

The interest rate of the Fed is the rate at which the Central Bank of America issues loans to American banks. Due to these loans, financial institutions raise the level of reserves in order to meet the requirements of the Federal Reserve System.

In most cases banks lend to each other, but if banks do not have the opportunity to help their "colleague", the latter appeals to the Fed. This loan must be returned by law the next day. The Fed is negative about such loans. If they are also getting more frequent, the Fed has the right to tighten the requirements for mandatory reserves.

Why do we need an interest rate

The need for it is as follows: it is the basis for calculating other rates in the state. Along with this, the FRS loans are low-risk loans, because they are issued only for one night and only to banking institutions with an excellent credit history.

If we look at stock markets, the increase in rates is the growth of the cost of the organization's capital. That is, for enterprises whose shares are traded on the exchange, this is a negative point. In bonds, otherwise - an increase in the rate leads to a decrease in inflation.

The market of currencies is a little more difficult, here the rate of the FRS influences the courses from several sides. Of course, there is a course, on it are all transactions with currencies. But this is only a small part of the scheme. The financial flows of the world, responsible for most of the world's currency market transactions, are a movement of capital that is caused by the desire of investors to find a greater return on investment. Taking into account the situation of all types of markets, including the housing market and inflation data, in any country the increase in the discount rate has both a positive and negative impact on profitability.

Prior to this, the Fed's rate increased on June 29, 2006. For 2007-2008 years. The Federal Reserve slowly reduced it until the moment when it did not approach the smallest indicator at 0-0.25% in winter 2008.

Fed rate increase

What this action will lead to, consider below. Labor market indicators in the small and medium business in America are today the highest, and the unemployment rate has halved compared to 2009. The Fed believes that the recovery of the labor market has all chances to spur inflation and higher wages, thereby supporting the economy of the state.

In the years 2007-2009 In the US there was a crisis in the housing market and in the banking sector. The Fed then managed to keep the economy of the state from going into depression.

Can the US economy survive an increase in the Fed's rates today? Analysts here make different assumptions. Some argue that the Fed was able to smoothly maintain the economic position of the state afloat. And then raising the Fed rate by 0.25 points will have a minimal impact on the US economy. Others point to a very low inflation rate, arguing that the Fed can thus bring down global markets and create prerequisites for an appreciation of the dollar if the Fed rushes to a decision.

The chairman of the Federal Reserve says that the growth of rates is planned to be smooth. Experts in this area believe that the growth rate will be lower, comparing with the time of the last session, which was started in 2004. The final rate of the discount rate will not exceed 3%.

Are all ready for change? Some corporations used time with a low rate for making loans through the bond market. And now they say they do not see a reason for concern in a small increase in the rate, believing that the market has already been able to use all the opportunities. At the same time, a large number of organizations that are only holding on to low rates will not be able to withstand their growth, and thus they will have problems after increasing the cost of loans.

Paying attention to investors, most experts believe that the Fed in advance warned them of their intentions, and traders certainly already took into account the future growth in strategies. But some experts are sure that volatility from such serious adjustments in monetary policy will still be, given that seven years the indicator was zero.

Below we will look at how the discount rate of the Fed can influence global markets.

The discount rate and its impact on the economy of England

Most economists believe that the Bank of England will follow the American Central Bank to raise rates. History has more than once seen how US and UK discount rates were adjusted simultaneously.

Today, the growth of the economy of Foggy Albion is stable, the demand for labor is high. The head of the Bank of England pointed out that, perhaps, growth will become smooth.

The discount rate and its impact on Russia

The central bank of the Russian Federation will not be able to avoid negative influences from the strengthening of the US currency and growth of the discount rate. This fact will entail problems with the buildup of international reserves, which have declined to $ 365 billion from over $ 500 billion.

Experts believe that, of course, the growth of rates will negatively affect the economy of our state. But this influence will not be so strong in comparison with other emerging markets., As due to the sanctions of the Russian Federation it is not so much economically connected with the USA.

The discount rate and its impact on Europe

The growth of the discount rate may adversely affect the economic situation of the EU countries, this can cause an increase in the volatility and unpredictability of the market.

The head of the European Central Bank and other politicians believe that the recent wave of volatility in world markets will have a strong negative impact on the revival of the European economy.

The discount rate and its impact on China

In response to a question about what will happen if the Fed raises rates, Chinese authorities believe that they will be able to avoid a direct impact on the economy of the state on the growth rates, and the impact will be small.

The rate of the Federal Reserve in a limited range affects the economy of the Heavenly Empire. Internal factors have a negative effect on the economy of the state, for example, the decline in the competitiveness of products manufactured for export and overproduction.

Accounting rate and its impact on Japan

Inflation here is also practically at the zero level. Therefore, if the Fed refuses to tighten the policy, sooner or later there will still be a significant difference between the rates of the US and Japan.

According to some experts, raising the Fed rate will make the US currency more attractive. But along with this, the weakening of the Japanese currency will negatively affect the share of profits of importers and increase the share of profits of large exporters.

At what stage is the market now

The essence of this step, like raising the interest rate of the Fed, is to bypass the emergence of market "bubbles", which are caused by the very soft monetary policy of the Fed, held for a long time.

To assess the current situation, it is better to conduct a retrospective analysis. Here it is important to note that the selection of the stages of the economy is a very subjective moment. Probably, 2016 will be in the middle of the economic cycle.

Experts, however, do not expect sharp movements from the Fed. But there is a danger in a rather late or essentially slow movement of such a step as raising the Fed rate, which can lead to a rapid rise in inflation and a faster growth of the Fed's key rates , which will have a very negative impact on the stock market.

Conclusion on the reasoning about the Fed raising the rate to what will result can be formulated as follows: until the Federal Reserve announces an increase in interest rates, it is better to get rid of the shares of American companies. After the rates begin to grow, you can wait for the correction of the market and again acquire American assets.