The Federal Reserve System of the United States of America obliges any bank in America to form a certain amount of cash reserves. They are needed to conduct transactions with customers. This is necessary in case the majority of clients suddenly want to withdraw all their deposits. In this case, a banking institution may simply not have enough finance, and then, most likely, another banking crisis will come. It is because of this that the Fed sets certain limits for the amount of required reserves, the size of which is affected by the Fed rate.
What is the Federal Reserve Rate
Every day, banks carry out a huge number of transactions, and each of them tries to increase their volume in order to increase their profits. Sometimes, unannounced clients come in and withdraw large amounts of money, causing the financial institution's reserve requirement to drop and no longer meet the Fed's guidance. This will cause a lot of problems for the bank in the future.
The Fed's interest rate is the rate at which the Central Bank of America lends money to American banks. With these loans, financial institutions are raising their reserve levels to meet Fed requirements.
In most cases, banks lend to each other, but if the banks do not have the opportunity to help their "colleague", the latter turns to the Fed. This loan, according to the law, must be returned the next day. The Fed has a negative attitude towards such loans. If they also become more frequent, the Fed has the right to tighten reserve requirements.
What is the interest rate for
Its necessity is as follows: it is the basis for calculating other rates in the state. Along with this, Fed loans are low-risk loans because they are issued for one night only and only to banking institutions with excellent credit history.
If we consider the stock markets, an increase in rates is an increase in the cost of capital of an organization. That is, for enterprises whose shares are traded on the stock exchange, this is a negative point. Bonds are different - an increase in the rate leads to a decrease in inflation.
The currency market is a bit more complicated, here the Fed rate affects rates from several sides. Of course, there is a course, according to which all transactions with currencies go. But this is only a small part of the scheme. The financial flows of the world, which are responsible for most of the transactions carried out in the world in the currency market,act as a movement of capital, which are caused by the desire of investors to find a greater return on investment. Taking into account the position of all types of markets, including the housing market and inflation data, in any country, an increase in the discount rate has both a positive and a negative impact on profitability.
Before this, the Fed's rate increased on June 29, 2006. For 2007-2008 The Fed slowly cut it down until it approached its lowest point of 0-0.25% in the winter of 2008
Fed rate hike
What this action will lead to, consider below. America's small and medium-sized business labor market is the strongest today, and the unemployment rate has dropped by half since 2009. The Fed believes that the recovery of the labor market has every chance to spur inflation and wage increases, thereby supporting the state's economy.
In 2007-2009 in the US, there was a crisis in the housing market and in the banking sector. The Fed was then able to keep the state's economy from going into depression.
Can the US economy survive the Fed rate hike today? Analysts here express different assumptions. Some argue that the Fed was able to smoothly keep the state's economic position afloat. And then the Fed rate hike by 0.25 points will have a minimal impact on the US economy. Others point to a very low value of inflation, arguing that in doing so, the Fed can bring down world markets and create preconditions for the dollar to rise,if the Fed rushes to a decision.
Fed Chairman says rate hikes are planned to be smooth. Experts in this area believe that the growth rate will be lower compared to the last session, which was launched in 2004. The final discount rate will not exceed 3%.
Is everyone ready for change? Some corporations have used the low rate time to borrow through the bond market. And now they say they see no cause for concern in a small increase in rates, believing that the market has already been able to use all the opportunities. At the same time, a large number of institutions buoyed only by low rates will not be able to withstand their growth, and thus they will have problems after the increase in borrowing costs.
Paying attention to investors, most specialists believe that the Fed warned them in advance of its intentions, and traders have probably already taken future growth into account in strategies. But some experts are sure that there will still be volatility from such serious adjustments in monetary policy, given that the indicator has been zero for seven years.
Let's look at how the Fed's discount rate can affect global markets.
The discount rate and its impact on the economy of England
Most economists believe that the Bank of England, following the American Central Bank, will raise rates. History has repeatedly seen how the discount rates of the United States and Englandadjusted 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 the growth of the discount rate. This fact will cause problems with the build-up of international reserves, which have decreased to $365 billion from over $500 billion.
Specialists believe that, of course, the increase in rates will have a negative impact on the economy of our state. But this impact will not be as strong compared to other emerging markets, since, due to sanctions, the Russian Federation is no longer so economically connected to the United States.
The discount rate and its impact on Europe
An increase in the discount rate may adversely affect the economic situation of the EU states, this may cause an increase in 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 recovery of the European economy.
The discount rate and its impact on China
In response to the question of what will happen if the Fed raises rates, the Chinese authorities believe that they will be able to avoid the direct impact on the economy of the state from the increase in rates, and the impact will be small.
Fed rate inlimited range affects the economy of the Middle Kingdom. A negative impact on the economy of the state is exerted by internal factors, for example, a drop in the competitiveness of products manufactured for export and overproduction.
The discount rate and its impact on Japan
Inflation here is also almost at zero level. Therefore, if the Fed refuses to tighten policy, sooner or later there will still be a significant difference between US and Japanese rates.
According to some experts, the Fed's rate hike will make holding US currency more attractive. But along with this, the weakening of the Japanese currency will negatively affect the profit share of importers and increase the profit share of large exporters.
At what stage is the market now
The essence of the Fed's interest rate move is to circumvent the emergence of market "bubbles" caused by the Fed's very loose monetary policy over a long period of time.
To assess the current situation, it is better to conduct a retrospective analysis. Here it is important to note that the allocation of stages of the economy is a very subjective moment. 2016 is likely to be in the middle of the economic cycle.
Experts, however, do not expect sharp movements from the Fed. But there is a danger in the rather late or significantly slow movement of such a move as a Fed rate hike, which could lead to a rapid increase in inflation and a faster increase in the Fed's key rates, which will have a very negative impact onto the stock market.
The conclusion to the arguments about what the Fed rate hike will lead to can be formulated as follows: before the Fed announces an increase in interest rates, it is better to get rid of shares of American companies. After the rates start to rise, you can wait for the market to correct and buy American assets again.
