Tag Archives: Federal Reserve Bank

Global Implications of Rising Interest Rates in the United States

Markets around the world are watching the United States Federal Reserve Bank and its anticipated move to increase interest rates in the United States this afternoon. The Fed is widely expected to increase interest rates by .25 points today. For seven years, interest rates in the United States have been kept near zero in an effort to stimulate the economy. While inflation remains well below the Fed’s two percent target and unemployment is falling, albeit slowly, markets are watching for the Fed’s statement to signal whether it will continue to increase rates in 2016.

The US Federal Reserve’s Open Market Committee sets national monetary policy, largely by setting its benchmark interest rate on which many other interest rates in the country are based. But the interest rate has wide-ranging implications for the global economy. An increase in the Fed rate would likely result in an increase in the value of the US dollar relative to other global currencies, making US exports less competitive abroad. Because oil is priced in US dollars, an increase in the value of the dollar could make oil more expensive for other countries by increasing its price relative to local currency values. It would increase the cost of borrowing for both private individuals and countries.

What do you think? What are the likely impact of an increase in interest rates in the United States on the US economy and economies around the world? Should the Fed increase interest rates? Why?

Five Stories You Might Have Missed

It was a busy week for the U.S. Federal Reserve. Addressing a meeting of bankers on Friday, the Chair of the U.S. Federal Reserve, Ben Bernanke, called on legislators to address the need for regulatory reform of global financial markets. On Wednesday, the Federal Reserve undertook announced new plans intended to improve the position of the U.S. credit markets. With the federal funds rate remaining near zero percent, the Federal Reserve has been forced to turn to a program of qualitative easing, under which it purchases mortgage-related securities, removing them from the market and expanding the amount of cash in circulation. It is coordinating policy with the central banks of England, Japan, and Switzerland. But the dramatic move carries a number of risks, including the introduction of high rates of inflation and a decline in the value of the dollar

In news from outside the United States last week:

1.  A two-day meeting of the European Union last week produced a number of important outcomes, including a commitment to increase the E.U.’s contribution to the International Monetary Fund by €75bn. The European Union also staked out its position on reforming global financial market regulation, the focus of an upcoming G20 meeting in April. Current speculation is that the meeting of the G20 will likely pit Germany and France, which favor stricter regulation, against the United States and China, with the United Kingdom falling somewhere in the middle. However, all sides are currently playing up the likelihood of compromise.

2. On Saturday, the Abhisit Vejjajiva’s government in Thailand survived a no confidence motion in the national legislature. Vejjajiva has been in office for only three months, but has been under fire nearly the entire time, as Thailand has been plagued by political and economic instability compounded by declining exports, part of the impact of the global economic crisis. 

3. On Thursday, the government of China announced it would step up naval operations in the South China Sea, specifically targeting the disputed Spratly Islands. The Spratly Islands are claimed (in whole or in part) by at least six countries, including Brunei, China, Malaysia, the Philippines, Taiwan, and Vietnam. The announcement comes after a standoff between U.S. and Chinese naval vessels earlier this month, when the U.S. accused China of harassing a U.S. naval vessel operating in the South China Sea. China maintains the vessel was operating illegally in Chinese waters.

4. Israeli President Shimon Peres last week granted Likud party leader Benjamin Netanyahu two more weeks to form a coalition government. Netanyahu’s right-wing Likud party was named by Peres as formateur party after extremely close restuls in national elections earlier this month.  Netanyahu has the option of forming a coalition with a group of far-right and religious parties, but has been seeking to form a more centrist coalition with either Ehud Barak’s Labour party or Tzipi Livni’s Kadima party. A more centrist coalition, Netanyahu believes, would be better positioned to avoid potential clashes with the United States. But both Labour and Kadima remain hesitant to join a coalition government with Likud.

5. Andry Rajoelina was sworn in as the new president of Madagascar on Saturday. Brought to power under the auspices of a military rebellion, Rajoelina committed the new government to routing out the corruption of the previous regime and to re-establishing democracy within two years. But may observers remain skeptical. On Friday, the African Union suspended Madagascar from the organization, many donors have announced they will freeze aid, and the United States

And a bonus story this week:

6. A standoff between farmers and the government in Argentina last week threatens global food markets. Farmers are angry about the imposition of a 35 percent duty on soya exports and bans on export of some other food commodities. A similar standoff last year resulted in nationwide strikes and export bans. The standoff in Argentina has the potential to influence global food prices, as Argentina is one of the word’s largest food exporters—second only to the United States. China is the largest consumer of Argentinean soya exports.