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Are global markets prepared for the Fed summer rate hike? - Alldamoney

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Are global markets prepared for the Fed summer rate hike?



The interest rate that applies to investors, borrowers and savers is the Federal Reserve's funds rate or central bank rate as applies to different countries. Banks are charged this rate for borrowing money from Federal Reserve banks. Now is this rate important? Based on the factors of demand and supply an increase in price would affect the demand a good. This also applies to money in circulation through the increase of the cost of money the Fed try to control inflation. Inflation is caused by too much money chasing too few goods (or too much demand for too little supply), which causes prices to increase. By influencing the amount of money available for purchasing goods, the Fed can control inflation. all countries' central banks do this same for same reason.



James Bullard St. Louis Federal Reserve President recently said that the global markets seem prepared  for the proposed interest rate hike from the Fed this summer , though no specific date slated for the policy move.
"My sense is that markets are well-prepared for a possible rate increase globally  and that this is not too surprising given our liftoff from December and the policy of the committee which has been to try to normalize rates slowly and gradually over time," Bullard told a news conference after speaking at an academic conference in Seoul.

"So my thought is that, if all goes well this will come off very smoothly. He reserved his opinion on if the hike would be in June or July but added instead that a rebound in U.S. GDP growth should materialize in the second quarter. While responding to the GDP data that showed first-quarter growth in the U.S. was not as weak as initially expected, Bullard said strong income growth, together with signs the economy was picking up steam in the second quarter, could give the Federal Reserve ammunition to raise interest rates as early as next month.

IMPACT ON THE ECONOMY

For savers,

This good news a low interest rate is an equivalent  of a long drought  finance being over.  Any slight increase , even modest, is a  welcome and overdue development. since September 2012, according to a weekly survey by  Average 1- and 5-year certificates of deposit have paid less than 1% interest.
Economists surveyed by Bankrate cite the higher returns paid on savings as an unintended benefit of a Fed rate hike, more than any other factor. "Rising interest rates would benefit  people on fixed incomes and others who rely on interest income to help cover their living expenses.

For borrowers

This is bad news as When the Fed increases the federal funds rate, factors that influence both individuals and businesses are affected. it becomes more expensive for banks to borrow money from the Fed. Increases in the federal funds bring a ripple effect the first   an  increase on the rates  they charge their customers to borrow money. Individuals are affected through increases to credit card and mortgage interest rates, especially if they carry a variable interest rate This has an effect of decreasing the money amount consumers can spend. After all, people still have to pay the bills, and when those bills become more expensive, households are left with less disposable income. This means that people will spend less discretionary money, which will affect businesses' top and bottom lines (that is, revenues and profits). 

For investors

Asset Price Effects
A change in federal funds rate affect the behavior of consumers and businesses, and most asset prices are mostly affected even the stock market. Asset price fluctuates as a result of the different expectations that people have about the company at different times. Because of those differences, they are willing to buy or sell shares at different prices. If a company is seen as making less profit either because of higher debt expenses or less revenue from consumers then the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company's stock. If enough companies experience declines in their stock prices, the whole market, or the indexes (like the Dow Jones Industrial Average or the S&P500) that many people equate with the market, will go down.

Finally
The interest rate has a wide and varied impact upon the economy  when raised; the general effect is a lessening of the amount of money in circulation, which works to keep inflation low. It also makes borrowing money more expensive, which affects how consumers and businesses spend their money; this increases expenses for companies, lowering earnings somewhat for those with debt to pay. Finally, it tends to make the stock market a slightly less attractive place to investment.

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