When is the Federal Reserve expected to increase interest rate? This is being called the $9 trillion question. US economy is now tied closely with the global economy. A interest rate hike by the Federal Reserve will be felt all across the global economy.
When Group of 20 finance ministers this week urged the Federal Reserve to “minimize negative spillovers” from potential interest-rate increases, they omitted a key figure: $9 trillion. That’s the amount owed in dollars by non-bank borrowers outside the U.S., up 50 percent since the financial crisis, according to the Bank for International Settlements. Should the Fed raise interest rates as anticipated this year for the first time since 2006, higher borrowing costs for companies and governments, along with a stronger greenback, may add risks to an already-weak global recovery.
The developed economies will rather benefit from the FED interest rate hike. However the emerging economies will face negative repercussions. the important question is how will the interest rate increase affect the stock market. Don’t worry about the Fed; be happy. That is the message from analysts and market strategists. The Federal Reserve signaled this past week that it is unlikely to raise short-term interest rates until at least June. And that rise, when it comes, will be a good thing, investment professionals are saying, since the Fed will raise interest rates only when it is confident that the economic recovery is robust and companies have regained the ability to raise prices.
The market is expecting the interest rate increase to take place somewhere in June 2015. What this means is that by that time this interest rate increase will be already factored into the stock prices. This is what happens when there is no surprise. Markets work on the principle of expectations. When an interest rate increase is being expecting by the market, it will get factored into the prices by the time of interest rate increase.
So how does the Federal Reserve solve this problem of expectation developing the markets and loosing control of its monetary policy? This problem is resolved by keeping the market guessing most of the time. While there are growing doubts among economists that the Federal Reserve will make their first hike in short-term interest rates in June, don’t look for the U.S. central bank to give any hints that it may hold rates at zero a little while longer than expected.
Following two days of deliberations, the Federal Open Market Committee will release a statement at 2 p.m. on Wednesday. There will be no press conference.
“We think the FOMC will be reluctant to make changes to the statement that might influence expectations for Fed action, particularly when there is no press conference to explain any ‘meaningful’ additions or deletions to the text,” said Michelle Girard, chief U.S. economist at RBS Securities, in a note to clients. Economists at RBS, Goldman Sachs and Wrightson ICAP have pushed their forecast for the first Fed move from June to September.
Gold prices are intricately linked with the interest rates in US. Conventional wisdom is that gold should be face high selling when FED increases the interest rate. But some analysts are questioning this conventional wisdom at face value. They think that interest rate hike will be good for the gold market. Gold’s sharp early-year surge has fizzled in recent weeks as investment demand faded. The primary reason is the universal belief that the Fed’s upcoming rate hikes are very bearish for gold. Higher rates will make zero-yielding gold relatively less attractive, argues this popular thesis. But history proves just the opposite. Gold actually thrives in rising- and higher-rate environments, so rate hikes are nothing to fear.
If you are a gold trader or a currency trader who trades the USD pairs like EURUSD, GBPUSD, USDJPY, NZDUSD, AUDUSD, USDCAD etc, you should keep an eye on the FED. Now if you are not sure how the FED changes the interest rate, watch the video below that explains how the FED changes the interest rate.
This is another video that explains how the FED changes the interest rate.