Today Interest rates can be considered to be an estimated amount of the bank reserves in US banking. The market is great but every single day Fed officials are trying to determine the markets inflation, economic growth, stock market growth, and bonds to establish whether we will be seeing an increase or decrease in future interest rates. A very common misunderstanding is that the Fed directly sets these market interest rates, however, it should be noted that ‘the only interest rate the Fed can set is the discount rate, which is the interest rate that the Fed charges banks that want to borrow from the Fed’ (Kidwell P.71). In today’s market the Fed has been signaling to be kept at 2.5% through 2021 as of March 21, 2019 after the (FOMC) meeting. The Federal Open Market Committee sets a target for the fed funds rate at its regular meeting. Banks charge each other this rate when they lend each other funds which are loans banks make to each other to meet the Fed’s reserve requirement. These target rates will be met with the Fed decreasing the amount of reserves in the banking system with the goal of decreasing the money supply, which should put an upward pressure on interest rates. This is the way that the fed has a hand on how interest rates are conducted and how the Fed can manipulate how interest rates will be in the long run. The Fed’s Funds Rate pulled an effect on the change in money supply, shown by (Kidwell P. 75) ‘the interbank lending rate represents the primary cost of short-term loanable funds’ which is closely related to monetary policy and measures the reserves in the banking system used to influence economic lending. As of now interest rates are on pause and Fed officials are gathering data such as inflation rates, economic growth, and stock and bond market growth to determine whether future rates will be increasing or decreasing. Due to these factors, it can impact the feds influence on interest rates in today’s US economy.
To begin with, with the Feds interest rates on pause, current market growth measurements have kept data to determine that the economy is at a steady rate in the US economy in the meantime. The Economy has recharged officials to raise their growth on forecasts but to remind the public of possible higher inflation in the near future. With that being said the truth is changing inflation rates is what causes this ‘uncertainty’ that the Fed is experiencing. The Fed has set a steady target rate of 2% inflation which is great but it means that the smaller the percentage of goods and services can be purchased with the same amount of money as before and makes it more unlikely to go into a recession or a market crash. Although the inflation rate is steady, through wall street journal (WSJ) Federal Reserve Bank of Cleveland President Loretta Mester alleged that ‘it still remains possible the U.S Central bank might raise rates again. Which discusses inflation staying near 2% the Fed-funds rate may need to move a bit higher than current levels.’ (Derby, 2019. ‘Feds Mester says rate increases still possible’) Some Fed officials have said a rate cut is possible but on the other hand some have said there is still a chance rates will rise. Although Inflation is a fear of investors it erodes the purchasing power of their value of money. Due to inflationary cautions, the Fed is tasked with contracting the economy in efforts to avoid hyperinflation. According to Mr. Harker the market ‘expects inflation, which is now short of the central bank’s 2% target, to rise slightly over that level this year and next.’Which are also risks to our economy. (Derby, 2019. ‘Feds Harker sees at most one rate rise in 2019, another in 2020.’) Effects of inflation such as businesses being forced to raise their prices, means that banks are forced to raise interest rates in order to maintain a profit margin and higher rates means that marginal businesses will fail, therefore increasing unemployment and harming the overall economy. But over the last 100 consecutive months the U.S labor market has added jobs and while ‘inflation pressures remained stubbornly muted for much of the past decade, giving the Fed few reasons to accelerate its pace of rate increases, the tight labor market appears to have finally started to translate into a pickup in wages.’ (Otani, 2019. Investors Sound Warning About Markets’ Complacency on Interest Rates.’) The Fed has signed onto this current pause in rates and is stating that ‘as long as inflation remains at or below the Fed’s 2% target, the case for interest-rate increases is not there.’ (Timiraos,2019. Federal Reserve Rate Projections Could Show Greater Confidence in Extended Pause.)
Additionally, Fed changes in interest rates have a tremendous impact on the U.S. bond and stock market and can influence rates as a whole. For bonds specifically, projected steady interest rates illustrates the Feds fear of inflation, a major threat for bond holders yield as it chips away at the purchasing power of their fixed payments. Uncertainty of interest rate rises impacts the demand for bonds ‘worrying investors who believe the central bank could upend those expectations later this year’ as Nick Timiraos stated. (Timiraos,2019. Federal Reserve Rate Projections Could Show Greater Confidence in Extended Pause). After the Federal Open Market committee met in Washington, DC bond markets rallied which sent long term debt yields below short term yields. As Daniel Kruger stated ‘The yield on the benchmark 10-year Treasury note was a recent 2.508% compared with 2.537% before the report, according to Trade web. The yield settled at 2.512% Thursday.’ (Kruger, 2019.) This means that Yields which fall, when bond prices increase tend to decline slower wage growth in the market. The movement in bond prices shows a rebound in job creation last month which is a great sign for our economy’s future. According to Daniel Kruger (Kruger,2019.) ‘The combination of continued job gains and a slowdown in wage gains led investors to see little reason for the Federal Reserve to either raise or lower interest rate,’ which causes our extended pause in rates.
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