Oil, dollar, ruble: how they are affected by the increase in the Fed base rate. What does rising interest rates mean for ordinary people? How will the Fed rate increase affect the ruble?
On Wednesday, September 26, the US Federal Reserve raised its base rate by 0.25%, to a level of 2-2.25% per annum. This decision was made by the Federal Reserve's Open Market Committee following a two-day meeting in Washington. Previously, the American regulator raised the rate in June to 1.75-2%, and during a meeting in early August it maintained the status quo.
According to experts interviewed by RT, the Federal Reserve’s actions were expected. In their forecasts, analysts excluded the possibility of the rate remaining at the same level and highly assessed the likelihood of it reaching the range of 2-2.25% per annum. Moreover, according to data from the Chicago Mercantile Exchange CME Group, immediately before the meeting of the US Central Bank, 95% of respondents expected a rate increase of 0.25%, and only 5% of respondents - by 0.5% (to 2.25-2.5%). per annum).
The Fed's decision was supported by economic statistics from the United States. As follows from the materials of the US Department of Labor, in August core inflation in the country (excluding prices for energy and food) accelerated to 2.2%, but still remained close to the Fed target of 2%.
Let us recall that the global financial crisis forced the Federal Reserve to soften monetary policy and lower its interest rate. Thus, on December 16, 2008, a record low range was set - from 0 to 0.25% per annum. This measure was taken to stimulate economic growth during the recession - loans became cheaper, and, consequently, the level of consumption and investment began to grow.
The American central bank took a course towards increasing interest rates only in December 2015.
“During the 2008 crisis, the United States was the first to introduce a quantitative easing program, beginning to supply free liquidity to financial markets. In the current situation, in order to prevent its economy from overheating and to avoid inflating another “bubble” on stock exchanges, the Fed is systematically and carefully following the path of increasing the interest rate,” explained Finam Group analyst Sergei Drozdov in a conversation with RT.
In its monetary decisions, the Federal Reserve primarily relies on the inflation rate in the country. After a protracted easing policy, the rate hike is intended to curb the acceleration of consumer prices. Andrey Bezhin, director of consulting and brokerage services at QBF, spoke about this in an interview with RT.
“The Fed needs to keep the rate at the inflation level (this is a neutral level) or slightly higher to prevent prices from rising. A lot of money has been printed in the system since 2008, and economists naturally fear that this situation will sooner or later provoke hyperinflation,” Bezhin noted.
As the expert emphasizes, the Fed itself so far notes the absence of serious inflation risks. However, concerns about accelerating prices remain. First of all, they are related to what is observed in the world today, as well as Donald Trump’s tax reform. Although most experts today predict only a short-term impact of these factors on inflation in the United States, some economists believe that the consequences could be long-term, Bezhin added.
Forex Club Group analyst Mikhail Rytik emphasized that the American economy today is suffering from trade, so the country needs new investment resources. Tightening monetary policy, in turn, makes it possible to attract additional capital. At the same time, this situation leads to an outflow of funds from emerging markets.
“When rates are raised in the short term, the currencies of developing countries traditionally come under pressure, as investors abandon investments in them in favor of more reliable US government bonds and deposits in American banks (they also raise rates following the Fed),” the expert emphasized.
Without unnecessary movements
In a conversation with RT, Andrei Bezhin recalled that in its latest forecasts, the Fed promised to carry out four rate increases in 2018. The first two were made in March and June, so analysts expected to see the rate increase twice more - in September and December. Against this background, the markets had already been prepared for a long time, and the Federal Reserve’s decision did not come as a surprise to them. That is why experts interviewed by RT do not expect a strong reaction from financial platforms and world currencies to the results of the Fed meeting.
“The dollar is likely to strengthen moderately - expectations of an increase are already largely included in current prices. The US stock market may react with a slight correction, and the dynamics of emerging markets will likely be neutral - the currencies of these countries may continue to strengthen under the influence of internal factors,” added Anton Pokatovich, chief analyst at BCS Premier.
At the same time, experts emphasize that any other action by the American regulator regarding the base rate could provoke serious concern among investors. For example, according to Pokatovich, a sudden increase of 0.5% instead of 0.25% would lead to panic among investors and increase the fears of players about the stability of American markets.
“The rate would hardly have been increased by 0.5%, as this would have led to a sharp rise in the dollar exchange rate. Such a situation would have a negative impact on the state of the American economy, which does not benefit from a too strong dollar,” added Mikhail Rytik.
At the same time, in the long term, the national currency of the United States can still continue to gradually strengthen. According to Sergei Drozdov, as long as the Fed moves away from a soft monetary policy, the dollar will remain more attractive relative to other world currencies.
“As for the reaction of the Russian currency, in my opinion, an increase in the interest rate by the American regulator is unlikely to have a serious impact on the ruble, since in the current situation of the national currency, despite high oil prices, it largely depends on the sanctions agenda, within the framework of which there remain risks of the introduction of further restrictions by the United States regarding Russian government debt,” the analyst explained.
In general, according to experts surveyed by RT, following the Fed, a number of countries (especially developing ones) will also continue to raise their own interest rates.
The next meeting of the US Federal Reserve will take place on November 7-8. As follows from CME Group data, today most market participants expect a rate increase to 2.25-2.5% in December.
The US Federal Reserve raised the base interest rate by 25 bpsbasic pointov, up to 0.5-0.75percent per annum. “In light of realized and expected conditions in the labor market and in the field of inflation, the Committee decided to raise the benchmark for the federal discount rate. The approach to monetary policy remains accommodative and supports further improvement in labor market conditions and a return to two percent inflation,” the American regulator said .
Lessons from crises: do countries learn from mistakes?
In December last year, the financial regulator raised the rate by 25 basis points - from 0-0.25 percent to 0.25-0.5 percent. Previously, the basic discount rate was raised only in June 2006, and from December 2008 to December 2015 it remained practically at zero - 0-0.25 percent, which was accompanied by the largest issue in US history. Now the Fed predicts three more interest rate hikes next year, although two were previously expected. The Fed also raised its forecasts for GDP and unemployment by one-tenth of a percent, and for inflation by two-tenths in 2016.
Almost none of the analysts doubted that the US Federal Reserve would raise rates, which would lead to an influx of currency into the country, the purchase of securities and a strengthening of the dollar. The site talked about how this decision will affect the economy political scientist and publicist Leonid Krutakov.
— How will Donald Trump implement his promises in the new conditions? After all, with The real dollar is a decline e American exports, which is beneficial primarily to China, and uv increase in debt.
— Not an increase in debt, but an increase in debt servicing. Their debt arises from deficits, both trade and budget. They already have a colossal one. Therefore, the debt will grow, that's for sure. And Trump will increase it, they have nowhere to go. In fact, there is now a struggle in the United States for a magic machine that will turn US debt into investment for the world.
The most important trick that the Americans managed to achieve, starting with the conclusion of the Bretton Woods agreements, is that the country - the main debtor of the world - is its main creditor. That is, they turned their debts into loans for other countries. And that's why all the struggle is here. Will they be able to maintain this debt model or will they fail? If it fails, there will be an internal explosion of this bubble. Last time they raised the rate by 0.25, but the market practically did not react to this. Because the debt is colossal due to interest.
Fed rate - . Therefore, it turns out that they pay extra to those who took money from the United States. It is not the one who took the loan who pays, but the one who borrowed. This is generally an amazing situation, and the United States needs to solve this problem first of all, because they are eating up the income of the future, pension funds, social funds that they have. Because if it’s minus, it means they are spending what they have saved up. That is, a negative rate kills the future. And America is now squeezed. On the one hand, there is a colossal external debt that must be serviced, on the other, a low Fed rate.
In fact, it’s like you bring money to a bank, but you pay that bank for holding that money. And in Europe it’s the same, there is also a negative Central Bank deposit and a zero ECB rate for inflation.
It turns out that this is some kind of new economy that still needs to be seriously comprehended, to understand how it works and where it leads. That she's blowing bubbles, of course. Therefore, America is now between two millstones. And even the raised rate is still below inflation. And America will continue to eat itself.
— Trump intended to change the leadership of the Federal Reserve. What can Trump do with this system? How does the Fed influence global finance and the central banks of other countries?
— There was one president in US history who tried to take away the investment function from the Federal Reserve and subordinate it to the US Treasury, so that the US Treasury would deal with it directly. It was Kennedy. The Federal Reserve System is not subordinate to the US Administration, it is a commercial structure formed by 13 private banks, where, in particular, German capital is very seriously represented, because it is one of the parties to the agreement on the creation of the Federal Reserve System. There was a German banker who later became Hitler's main banker. The Fed has a very complex system. But something else is more important here - under this system created by the United States, they actually forced all Central Banks to withdraw from their state status - both European and Russian.
That is, our Central Bank is semi-formal in nature - semi-private, semi-state. It seems to be located on the territory of Russia and seems to be subordinate to Russia, but at the same time it is not formally subordinate to it, but is actually a division of the Federal Reserve System and prints derivatives for the dollar.
This is not an independent unit, because it is not provided with internal industrial resources, but with external dollar reserves. There was a substitution of national monetary units, and thanks to this, a system became possible for the United States when they turned their debt into investment.
That is, the United States prints money on credit and gives it to everyone - Russia, China, etc. Accordingly, these countries use it as investment. Such a magical “cook a pot, don’t cook a pot.” In America now this problem is the most important, because they are stuck in terms of expansion.
This system can only work when the dollar zone absorbs new capital assets, new economies. While the privatization of Eastern Europe and Russia was going on, while the seizure of Iraq and Libya was going on, while the dollar zone was being provided with new real industrial and raw materials assets, this system worked.
But as soon as they politically ran into Russia, Syria, as soon as China told them: we will not give up the state status of the People’s Bank of China (they protect their internal financial system from the external market) - this became a huge obstacle.
This year, according to which China was obliged to make the People's Bank a non-state, the same as we have in Russia, a division of the Federal Reserve System. But China, at the recent APEC summit in Libya, frankly told Barack Obama that it would not do this. Now the US faces another dilemma. Or declare China a non-market economy and exclude it from the WTO - but then so many contracts collapse that the United States does not know what to do. Or not give any reaction, but the States also cannot behave this way and do not know how to react.
Now the United States has so many problems that it’s scary to imagine how they will get out of this. This is a protracted, severe crisis. Trump is the harbinger of this crisis, or rather, the first rumble of thunder of the crisis. Will he be able to do something, reconstruct this system, or will it go on a rollercoaster ride, as Clinton wanted, with further global expansion? At least, Trump announced that there would be no expansion, but the creation of his own project on controlled territory - in Canada, Mexico, Europe...
For them the situation is twofold. This is Triffin’s paradox; he formulated it back in the 1960s. On the one hand, the dollar is a global currency - reserve and settlement, and on the other hand, it is national in nature, used internally and is subject to national interests. At least that's what is declared.
Therefore, when you accept the dollar as a measure of your domestic policy, you must understand that the US national interest is embedded in the dollar. Because money is not a fetish, not golden bars that can be exchanged for anything. Money is government obligations.
— Is it still as dangerous to engage in a fight with the Federal Reserve today? And how can the USA stillgutprevent the collapse of the dollar bubble?
— The financial overhang is 10 times the total global product. At the same time, not the entire total world product is subordinate to the dollar and is located in the dollar zone. A lot of things happen through swaps, China through barter works with Africa and the Middle East in many transactions. When we calculated the turnover of China and Africa, it turned out that in terms of metals they make the second turnover of the London Metal Exchange. This is actually a hidden turnover.
Of course, we must understand that with this dollar overhang they must either absorb the whole world or come up with some new unconventional assets. This was stated in the services agreement. For example, about the need to privatize the housing and communal services sector, state defense procurement, housing and communal services, education, and medicine.
These are the assets that England, for example, is proud of: education and medicine are assets that are not yet traded. They either need to be brought into circulation to support the dollar, because money requires assets more than assets require money. Assets need money for development. And barefoot and empty money needs assets to fill it, otherwise it will explode.
Therefore, there are two ways: capturing the outside world - China, Russia, continuing expansion, capturing energy resources and transferring them to your balance sheet. Because now Westerners are not allowed to have more than 20 percent of shares within our companies.
This was one of the terms of the agreement after YUKOS - up to 20 percent, please buy, trade on your exchange. For example, BP bought 18 percent of Rosneft. Now BP can trade all of Rosneft’s reserves on the stock exchange as its own, putting it on its balance sheet. And this is a colossal increase in capitalization. The formal principles approved by the United States that we can put on the balance sheet do not mean that they can actually manage these resources. We saw this in the Middle East, we also see it in Russia, which is now reorienting itself to China and India for gas and oil supplies.
Therefore, the United States has two options. Either expansion, but that was Clinton, or they limit their project to the Western Hemisphere, creating the so-called Great West. Then they will need to carry out a new wave of privatization, both in South America and in Europe, where it will be possible to privatize the housing and communal services system, education, all kinds of social functions up to defense procurement, stipulate that the state is prohibited from protectionist measures in the field of government procurement.
That is, let’s assume that we have joined these agreements. Then General Motors wins the contract to supply cars to the Ministry of Defense, and we cannot do anything. These will be the new rules that are dictated there. This is not the case, so the United States is balancing on the brink in terms of rates, walking by a thread.
The devaluation factor for the development of the dollar, which they have been using for a long time, has also been exhausted. They overstrained themselves trying to break Russia when they drove the price of commodities to the limit. They've inflated the corporate, speculative stock market so much that they don't know what to do with the money.
Giving money to Russia or China is the same as financing a competing political project. The point is not even in the economy, but in the fact that “if we give money to Putin, he will drill wells, and with this money from the sold oil he will set up missiles and all sorts of aircraft, and then in Syria he will give us a kick in the tail.” That's the problem for them.
And the money has been accumulated, lying in bags, but they cannot push it onto the market in developing countries, in Asia, in Russia, because they are politically prohibited. No one will pump up their competitor, but they don’t have any internal reserves where to develop, or what to invest this money in. They do not have their own industry, only service services - a service economy, where show business and supermarkets flourish, but there is no industry.
Or they must absorb some new assets and make them marketable. Hence such exotic topics - they passed a law that American companies have the right to develop natural resources on asteroids and on other planets. That is, it seems like nonsense from the realm of idiocy and Ward No. 6. On the other hand, this allows them to somehow verbally stimulate the financial market, which does not know where the money is. We have swelled with this huge bubble, but what to do with it?... Here is the problem - both debt and a financial bubble at the same time.
They themselves created such a colossal problem for themselves. They hoped that they would fail, break through the defenses of Russia and China and break into these markets. Back in 2008, the Americans wanted to open up the markets of Brazil, India, and China, but they said that we would not open our domestic market for you.
When this political round failed, then their financial crisis hit us, and the whole story of pumping up the economy, quantitative easing, both in the US and in Europe began. Because they needed to pay for the losses that their banks suffered from the inability to work with China, Brazil, India and Russia on the terms of these countries, and not on the terms of the United States.
Interviewed by Galina Tychinskaya
Preparedfor publicationYuri Kondratyev
Obliges any bank in America to form a certain amount of cash reserves. They are needed to conduct transactions with clients. This is necessary in case most clients suddenly want to withdraw all their deposits. In this case, the banking institution may simply not have enough finances, and then, most likely, another banking crisis will occur. 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 System
Every day, banks carry out a colossal number of transactions, and each of them tries to increase their volume in order to increase their profit. Sometimes clients come in without warning and withdraw large amounts of money, causing the financial institution's reserve requirement level to fall below Federal Reserve guidelines. This will cause many problems for the bank in the future.
The Fed interest rate is the rate at which the Central Bank issues loans to American banks. Through these loans, financial institutions increase the level of reserves in order to comply with Federal Reserve requirements.
In most cases, banks borrow from each other, but if banks are unable to help their “colleague,” the latter turns to the Fed. According to the law, this loan 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 requirements for required reserves.
Why do you need an interest rate?
Its necessity is as follows: it serves as the basis for calculating other rates in the state. In addition, Fed loans are low-risk loans because they are issued only for one night and only to banking institutions with excellent credit histories.
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. It's different for bonds - raising rates leads to lower inflation.
The foreign exchange market is a little more complicated; here the Fed rate affects rates from several sides. Of course, there is a course; all transactions with currencies are based on it. But this is only a small part of the scheme. the world, responsible for most of the transactions carried out in the world on the foreign exchange market, are the movements of capital, which are caused by the desire of investors to find greater profits from investments. Taking into account the state 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 negative impact on profitability.
Prior to this, the Fed rate increased on June 29, 2006. For 2007-2008 The Federal Reserve slowly lowered it until it approached the lowest level of 0-0.25% in the winter of 2008.
Fed rate hike
We will consider below what this action will lead to. Labor market indicators for small and medium-sized businesses in America today are the highest, and the unemployment rate has dropped by half compared to 2009. The Fed believes that the recovery of the labor market has every chance of spurring inflation and increasing wages, thereby supporting the state's economy.
In 2007-2009 In the United States 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 Fed survive a rate hike today? Analysts here make different assumptions. Some argue that the Fed was able to smoothly keep the state's economic situation afloat. And then a 0.25 point increase in the Fed rate will have minimal impact on the US economy. Others point to a very low inflation rate, arguing that the Fed could thereby collapse world markets and create the preconditions for an increase in the dollar if the Fed is in a hurry to make a decision.
The Federal Reserve Chairman says rate hikes are planned to be gradual. Experts in this area believe that the growth rate will be lower compared to the time of the last session, which began in 2004. The final rate of the discount rate will not exceed 3%.
Is everyone ready for change? Some corporations took advantage of the low rate time to borrow through the bond market. And now they say that they see no reason to worry about a slight increase in rates, believing that the market has already been able to use all the opportunities. At the same time, a large number of organizations that rely only on low rates will not be able to withstand their rise, and thus they will have problems as their borrowing costs increase.
When looking at investors, most experts believe that the Fed has given them plenty of warning of its intentions, and traders have likely already factored future growth into their strategies. But some experts are confident that there will still be volatility from such serious adjustments in monetary policy, given that the indicator has been zero for seven years.
Below we will consider how the Fed discount rate can affect global markets.
The discount rate and its impact on the English economy
Most economists believe that the Bank of England will follow the American Central Bank in raising rates. History has seen more than once how the discount rates of the United States and England were adjusted simultaneously.
Today, the economic growth of Foggy Albion is stable, and the demand for labor is high. The head of the Bank of England emphasized 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 the negative effects of the strengthening of the US currency and the growth of the discount rate. This fact will lead to problems with the build-up of international reserves, which have decreased to $365 billion from an amount of over $500 billion.
Experts believe that, of course, rising rates will have a negative impact on the economy of our state. But this influence will not be as strong compared to other developing markets, since, as a result of sanctions, the Russian Federation is no longer so strongly connected economically with the United States.
The discount rate and its impact on Europe
An increase in the discount rate may have a negative impact on the economic situation of the EU countries; this may cause increased volatility and unpredictability of the market.
The head 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 would happen if the Fed raised rates, the Chinese authorities believe that they will be able to avoid the direct impact on the state economy from the increase in rates, and the impact will be small.
The Federal Reserve rate has a limited impact on the Chinese economy. Internal factors have a negative impact on the state’s economy, for example, a drop in the competitiveness of products produced for export and overproduction.
The discount rate and its impact on Japan
Inflation here is also almost zero. 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, raising the Fed rate will make owning the American currency more attractive. But at the same time, the weakening of the Japanese currency will negatively affect the share of profits of importers and increase the share of profits of large exporters.
What stage is the market at now?
The point of raising the Fed's interest rate is to circumvent 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. It is important to note here that identifying the stages of the economy is a very subjective point. 2016 will likely be in the middle of the economic cycle.
Experts, however, do not expect sudden movements from the Fed. But there is a danger in a rather late or significantly slow move of such a move as the Fed rate hike, which could lead to a rapid increase in inflation and faster growth of the Fed, which will have an extremely negative impact on the stock market.
The conclusion to the discussion about what the Fed's rate hike will lead to can be formulated as follows: before the Federal Reserve announces an increase in interest rates, it is better to get rid of shares of American companies. After rates begin to rise, you can wait for a market correction and purchase American assets again.
This week the economic press talked a lot about the Fed meeting, from which everyone expected to hear something new regarding interest rates. And in the end, they heard - an opaque hint that someday or very soon the regulator will begin to change the base rate. However, as CNN-Money writes, many Americans are not at all aware of what the Federal Reserve System is doing and that its head, Janet Yellen, may change something very soon.
Already in June of this year, the Fed may do something that it has not done for a very long time - raise interest rates. But it's time for people to realize that rising interest rates will affect everyone who has a mortgage, car loan, savings account or money in the stock market. In short, life is about to get better for savers and a little more difficult for borrowers. Investors may also face difficult times.
"The losers will be the borrowers and the winners will be the savers," says Ted Peters, CEO of Bluestone Financial Institutions Fund and a former member of the Federal Reserve Bank of Philadelphia.
Here is a complete list of results from the rate increase.
1. Mortgage rates and real estate prices will rise: having received a signal from the Federal Reserve that they will soon raise rates, many borrowers will rush to complete transactions now. The country has already begun a large influx of applications for mortgage loans, and some are simply asking to refinance an old loan in order to lock in lower interest rates. "People thinking about buying a home need to act quickly to get deals done in today's low rates," says Dean Croshore, an economics professor at the University of Richmond and a former Philadelphia Fed economist. The average 30-year mortgage has an interest rate of 3.8%, according to Freddie Mac. Compare with last year - then the average rate was about 4.3%. Part of the Fed's rate cut to historic lows in 2008 was to "reset" the housing market, which had collapsed when the housing bubble burst. When the Fed raises rates this year, it will certainly push up mortgage and auto loan rates.
2. Successful investors. Since the last financial crisis, people who put their money in the bank have received almost nothing because interest rates are so low. Things are about to change for the better for those with savings accounts. Once the Fed raises interest rates, deposit rates should rise as well. The average interest rate on a savings account right now is just 0.44%, according to Bankrate.
3. Work, work, work... One of the main reasons why the Fed plans to raise interest rates is the improvement of the US economy - especially the situation in the labor market. Unemployment is falling to its lowest level since 2008, and the US added millions of jobs last year. "The labor market is improving," Yellen said Wednesday. “Some of the headwinds that have been accompanying the economy are starting to recede.” The bigger concern among economists now is that rate hikes could hurt future wage growth. Many Americans did not feel the success of the economic recovery because their wages did not increase. The Fed wants a wage growth rate of 3.5%, but it was only 2% in February. However, Yellen has made it clear that rising wages are not the deciding factor to raise interest rates. Wages are usually the last in line to rise during economic recovery.
4. Rocky road for stocks: The stock market was rattled on Wednesday after the Fed's official announcement. Investors largely reacted sharply to the Fed's announcements, suggesting the central bank will not raise rates in April and will likely raise them only slightly in June or later. Any rate hike will almost certainly increase volatility. The stock is already considered expensive, and many analysts on Wall Street are afraid of an unexpected correction (where stocks drop 10% or more at once), something that hasn't happened since 2011. “Overall, stock prices are at high levels, but not beyond all-time highs,” Yellen said Wednesday. Raising Fed rates could make stocks less attractive to investors. It would also make sense to raise interest rates on US bonds, which are considered safer investments.
Federal Reserve System, USA: online meeting calendar and current interest rate information. The last meeting took place on July 31, 2019, the current interest rate is 2.25%.
Federal Reserve - interest rate chart
The Federal Reserve System in 2018 is an important link in the American and global economic system. Understanding how the Fed works, what processes it influences and what it regulates in the world gives advantages to any novice investor.
The Federal Reserve is the regulator of the US banking system. But, unlike the rest of the world's central banks, in America the central bank is a private structure that was formed at the dawn of the country's independence in 1813, when several national banks of the colonial countries operated on its territory. They did not have enough information to take into account local specifics, and therefore national banks worked ineffectively, especially during periods of crisis.
Federal Reserve Headquarters in Washington
Fed rate
The principle of issuing dollars into the US economy is as follows: in fact, the state borrows dollars from the Fed by selling it its government debt bonds, which are repaid later with interest. The amount of this interest is the Federal Reserve's federal funds rate.
Since, according to state requirements, banks must always have a certain reserve of funds, the need for loans arises constantly. By adjusting the rate, you can increase or decrease the balance of funds in commercial bank accounts. Loans are provided only for excess funds, i.e. by an amount greater than the required reserve established by the regulator.
The Fed cannot accurately set or determine the refinancing rate in the interbank market. Only the size of the discount rate is determined precisely. The refinancing rate is achieved through open market trading. Therefore, its level is set in a certain range in increments of 0.25% and is called the target rate.
The refinancing rate is key because... affects the size of the loan for ordinary consumers - individuals and legal entities. Banks are not required to use target rates, but use them as a guide. In order to keep the rate within the specified limits, the regulator itself actively trades on the market. The average of bank rates is called the effective federal funds rate.
Fed meetings are held according to the annual schedule. Decisions are made there on the country's monetary policy. These decisions are important for the entire global economy, because The dollar remains the world's main reserve currency.
The meetings end with a press conference by the chairman of the board, where he announces the results of the meeting and answers questions from the press. Results are always posted at 2 pm New York time.
Fed rate hike
2007 was a difficult year for the American economy. In order to ease the burden of the global crisis, the Federal Reserve came to the aid of the financial system by lowering interest rates in the United States to zero. However, keeping rates at a minimum level for a long time is fraught with an increase in inflation, so since 2016 the Fed has entered a cycle of increasing the federal funds rate (“tightening” or “normalizing” monetary policy).
The central bank has been open about its intentions to raise rates, but remains tight-lipped about the timing. Expectations of a rate hike lead to a strengthening of the US dollar, and if they are not justified at the next meeting, disappointed investors sell the US currency on the market.
Structure of the US central bank
The Fed is not one bank, as it might seem, but a family of several regional central banks located throughout America. There are twelve such branches in total. Despite the fact that systemically important banks are private, they are managed by one structure - the Board of Governors. Nine members of the Council are appointed by the President for a term of 14 years, and their nominations are confirmed by the Senate.
The Fed's managers decide all the important issues of the Central Bank - they set regulatory standards, monitor transactions with currency and securities, and set the size of the federal funds rate (Fed's Fund Rate). The Chairman of the Board of Governors of the Fed is Janet Yellen.
In addition to the regional banks of the Central Bank, there is another body - the US Federal Open Market Committee (FOMC). It performs supervisory functions in the internal markets of the states. The committee has twelve members - presidents of the US Reserve Banks and members of the Board of Governors.
There are also other councils that do not have decision-making powers that provide advisory support to the central bank. The main councils are the Federal Advisory Council, the Consumer Advisory Council and the Thrift Advisory Council.
Since the Fed is a joint stock company, its shares are available for purchase by commercial banks in America (of course, meeting certain criteria). Today the Fed has more than two thousand bank shareholders (this is no more than a third of American banks).
Fed shareholders cannot influence or interfere with the approval and adoption of monetary policy decisions. These kinds of important issues are decided only by the Board of Governors. Despite the independence from the US President in resolving issues, state control over the activities of the Federal Reserve exists.
It is carried out by two bodies:
- House of Representatives
- Congressional Banking Committee
They organize inspections of Federal Reserve banks, analyze reports, and issue recommendations. No one can change the Fed’s decision or impose a veto on it. The president of the country can theoretically fire any employee, but in practice there have been no such cases.
Federal Reserve System - functions
- Money issue- printing and putting US dollars into circulation. For the most part, the issued funds are used to purchase US Treasury bonds, after which the dollars enter circulation.
- Issue of regulations and laws regulating the operation of the banking system. The Central Bank issues operating licenses to banks.
- The Federal Reserve regulates the rights and responsibilities of depositors and borrowers, is responsible for the value of interest rates.
- The Fed is monitoring liquidity in the system, if necessary, issues loans on the interbank market, and stores reserves allocated by banks on deposits.
- The Federal Reserve regulates interbank payments.
- The Fed ensures economic stability, which contributes to its growth and helps strengthen the US economic influence in the world.
US Federal Reserve dollars
To maintain stable economic growth, the Fed buys and sells government securities, sets mandatory standards for banks' reserves of non-performing loans, and sets the size of the base and discount refinancing rates.
