"For only the second time in a decade, the U.S. Federal Reserve (Fed)
raised U.S. interest rates by 0.25%. The move had been widely expected
following firm evidence the U.S. economy is on the road to recovery.
This was the Fed’s final meeting before President-elect Donald
Trump’s inauguration. Following his numerous campaign-trail promises of
tax cuts and infrastructure spending, members of the Fed’s interest-rate
setting committee may have been wary of the potential for such policies
to further fan the flames of inflation.
Bond investors clearly expect interest rates to continue on an upward
trajectory next year. The yield on two-year Treasuries, which are
particularly sensitive to changes in interest rates, jumped to its
highest level since 2009 as investors sold bonds." - Blog - Thinking Aloud Aberdeen Asset Management
Questions:
Q:1 Why would the Federal Reserve's action of raising interest rate coincide with recovery in US?
Q:2 How is a rising interest rate related to inflation?
Q:3 What is the benefit to Bond investors in this new scenario?
Q:4 If you had purchased bonds this Christmas, what would be your expectation in future?
Semester II students, show me what you know about these issues by posting answers a your reactions and view...
10 comments:
ans:2- when there is lower interest rates , more people are able to borrow more money. It results in consumer having more money to spend,causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to save as returns are higher. With less money to spend as a result of the increase in savings, the economy slows and inflation decreases.
Inflation and interest rates are linked. Inflation refers to the rate at which prices for goods and services rises. In the United States, interest rates are determined by the Federal Reserve. In general, as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend(their purchasing power will increase), causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to save as returns are higher. With less income to spend as a result of the increase in savings, the economy slows and inflation decreases. By moving interest rate targets up or down, the Federal Reserve attempts to achieve maximum employment, stable prices and stable economic growth. The Fed will raise interest rates to reduce inflation. Conversely, the Fed will ease (or decrease) rates to spur economic growth.
(1) Fed is worried that if it were to keep interest rates low for the next few months, it might find itself with surging inflation in 2018 and be forced to raise rates more drastically to deal with the problem. That, in turn, could trigger a recession. So the Fed is hoping that slowly and gradually raising interest rates will strike a careful balance between the twin dangers of inflation and recession.
(2) If interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to save as returns are higher. With less disposal income to spend as a result of the increase in savings, the economy slows and inflation decreases.
(3) The bond investors would have a positive return and will be able to reinvest at higher yields.
(4) Due to the an increase in interest rates, I would be expecting higher returns in the near future.
After increase of interest rate will lead to economic development of USA. The faith of people towards banking industry is increases because they would get higher interest rate and leads to accumulation of wealth for both individual and country and will increase infrastructural development and also make people better off. Businessman and small scale trader wants to borrow money for expansion of their business to meet the demand of the market because people have more money and usher the purchasing power of an individual which would furnish better return to businessman. But this increase in interest rate has a disadvantage that inflation because many individual runs behind a single good which we lead to increase because D>S.
The interest rate is at highest level since 2009 and investor will invest in that area which stimulate higher rate of returns and this is the reward of risk taken by the investor as he doesn't know certainty of returns he will get. Every businessman or corporate will need expansion capital and wants investor to invest money by giving them promise of higher returns after certain period of time. Every human is greedy and wants his money to usher at a very by highest rate by investing in different schemes to get higher return in near future and increase in interest rate will lead to increase in liquidity in the market which is a good sign for a country.
In the United States, interest rates are determined by the Federal Reserve (sometimes called "the Fed"). In general, as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to save as returns are higher. With less disposal income to spend as a result of the increase in savings, the economy slows and inflation decreases.
Ans 1. It was in believed that if the US economy remains same for next few months, it would result in rushing of inflation in 2018. To curb the problem then in 2018, it would have to raise the rates harshly which would result in recession. So, gradually raising interest rates will save the country from Inflation as well as recession. Thus, Federal Reserve's action of raising interest rate occurs with the recovery in US.
Ans 2. Inflation- A general increase in prices and fall in the purchasing value of money.
Interest rate- An interest rate, is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed (called the principal sum).
When the interest rates are increased, consumers tend to save as returns are higher. With less income to spend because of the increase in savings, the economy of the country will slow and inflation will decrease. The increase in interest rate in US will help because the then president elect, in his, campaign-trail promised of tax cuts and that would result in Inflation.
Ans 3. The benefit to Bond investors in this new scenario is that the bond investors would have a positive return and will be able to reinvest at higher rate of returns and that would help the country’s economy.
Ans 4. I will expect Higher returns in reference with Ans 3.
ANANT GAUTAM (16BAL067)
Answer3.
Assume that you have taken a housing loan. Every month you have a fixed amount of income coming from your salary, and a big chunk of it goes into repayment of the housing loan. If interest rates increase, then you will need to give more interest for your loan. As a result of this, the amount of money that you can spend on other expenses (like movie tickets, groceries, eating out) also reduces. In other words, you will spend less.
Further, when the interest rates increase, then the returns on your fixed deposits will also increase. This means that you will now earn more interest on your savings. As a result of this, you would be tempted to invest more money in your savings. When you save more, you automatically spend less.
Now, look at this on the macro scale. So many people in the country would be affected by the increase in interest rates - their savings will increase, and interest expense will also increase - all of this ultimately points to one thing - they spend less.
What happens when everybody spends less?
The restaurants are waiting for customers, the movie halls are empty, even the shopkeeper keeps sitting all the day waiting for buyers. What are all these people concerned about? They don’t have buyers! And that’s why they are concerned.
What is an alternative course of action for them? The movie hall will probably reduce their prices in order to attract more customers. Ditto for the restaurants and the shopkeepers. Since everyone is spending less, the businesses are worried. They don’t want to lose out on business and hence they think that reducing the prices might help.
Hence, the effect of spending less is the prices of goods and services come down.
(1) Fed is concerned that if it somehow managed to keep interest rates low for the coming couple of months, it may wind up with soaring inflation in 2018 and be compelled to raise rates all the more radically to manage the issue. That, thus, could trigger a recession. So the Fed is trusting that gradually and bit by bit raising ROI will maintain an equilibrium between inflation and recession.
(2) A general increase in prices and fall in the purchasing value of money, is in economic terms - Inflation
In case of interest rates being lowered, more people would be able to borrow more. Hence, more money to spend for the consumers, causing the economy to grow and inflation to soar. The vice versa holds true for rising interest rates. With the increase in interest rates, consumers tend to save since returns then are higher. With lesser disposal income to spend as a result of the increase in savings, the economy slows and inflation decreases.
(3) The bond investors would have a positive return and will be able to reinvest at higher rate of interests.
(4) Due to the an increase in interest rates, I'd be expecting higher returns in the coming future.
(1)In the United States, interest rates are determined by the Federal Reserve (called "the Fed"). If the US economy remains same for next few months, it would result in inflation during 2018. To curb the problem then in 2018, it would have to raise the rates harshly which would result in recession. So, gradually raising interest rates will save the country from both Inflation and Recession. Thus, Federal Reserve's action of raising interest rate occurs with the recovery in US.
(2) When there is lower interest rates , more people are able to borrow more money. It results in consumer having more money to spend,causing the economy to grow and inflation to increase. The opposite also holds true. As interest rates are increased, consumers tend to save as returns are higher. With less money to spend as a result of the increase in savings, the economy slows and inflation decreases.
(3)The bond investors would have a positive return and they will be able to reinvest at a higher rate of interest.
(4)I'd be expecting higher returns in the near future, due to an increase in interest rates.
16BAL069
Inflation and interest rates are linked, and frequently referenced in macroeconomics. Inflation refers to the rate at which prices for goods and services rises. In the United States, interest rates are determined by the Federal Reserve (sometimes called "the Fed"). In general, as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to save as returns are higher. With less disposal income to spend as a result of the increase in savings, the economy slows and inflation decreases.
The Federal Open Market Committee (FOMC) meets eight times each year to review economic and financial conditions and decide on monetary policy. Monetary policy refers to the actions taken that affect the availability and cost of money and credit. At these meetings, short-term interest rate targets are determined. Using economic indicators such as the Consumer Price Index (CPI) and the Producer Price Indexes (PPI), the Fed will establish interest rate targets intended to keep the economy in balance. By moving interest rate targets up or down, the Fed attempts to achieve maximum employment, stable prices and stable economic growth. The Fed will raise interest rates to reduce inflation. Conversely, the Fed will ease (or decrease) rates to spur economic growth.
Investors and traders keep a close eye on the FOMC rate decisions. After each of the eight FOMC meetings, an announcement is made regarding the Fed's decision to increase, decrease or maintain key interest rates. Certain markets may move in advance of the anticipated interest rate changes and in response to the actual announcements. For example, the U.S. dollar typically rallies in response to an interest rate increase.
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