Showing posts with label federal fund rate. Show all posts
Showing posts with label federal fund rate. Show all posts

Saturday 8 December 2018

‘Balancing of raising rates too much versus not enough’

‘Balancing of raising rates too much versus not enough’
November 16, 2018, Friday

WASHINGTON: The US central bank is aiming to prolong the economic expansion but must balance the risk of raising interest rates too much or not enough, Federal Reserve chairman Jerome Powell said.

Amid increasing concerns in financial markets that the Fed will have to become more aggressive to head off inflation, Powell likened the job to walking in a dark room full of furniture.

In a discussion about the economy with Dallas Federal Reserve Bank President Robert Kaplan, Powell said the central bank is trying to steer between two common errors.

Holding the benchmark lending rate too low for too long could allow inflation to gain a foothold, he cautioned.

But the “other mistake – and we had plenty of advice to do this – is to raise rates too soon, and prematurely terminate an expansion.

“We haven’t done that,” Powell said.

However, “We’re at a point now where we have to take both of those risks very seriously, and that’s why we’ve been raising rates quite gradually.”

Economists almost unanimously expect the fourth rate increase of the year in December, but with a recent report showing wages finally beginning to rise, they are watching for indications about the likely pace of moves in 2019.

The Fed has repeatedly said it is likely to continue to raise rates gradually, with inflation holding right around its two percent target despite very low unemployment and continued job gains.

But Powell stressed that officials have not made the decision yet and will watch incoming data.

Likening the policymaking to “walking through a room full of furniture and the lights go off,” Powell asked, “What do you do? You slow down, you stop probably and feel your way. It’s not different with policy.”

The Fed chief also noted that the global economic outlook is slightly less optimistic this year.

There have been “growing signs of bit of a slowdown, and it is concerning,” he said.

Asked about the impact of President Donald Trump’s aggressive trade policies on the economy, Powell said while officials hear complaints from businesses, the effect of higher tariffs have not yet showed up in lower growth or higher inflation.

“We’re very pleased about state of the economy right now,” he said.

“If you look down the road you see challenges ahead” and “we have to be thinking about how much further to raise rates and the pace at which we will raise rates.”

Starting in December, Powell will hold a press conference after every policy meeting, rather than just four times a year, which he said means markets will have to get used to the possibility a rate move could come at any time. — AFP

http://www.theborneopost.com/2018/11/16/balancing-of-raising-rates-too-much-versus-not-enough/

Friday 25 November 2016

A rate hike in US will lead to flow of money from emerging markets. Emerging markets are vulnerable to negative risks.

Falling rupee depreciates 17 paise at 68.73/$

India Infoline News Service

November 24, 2016

The Indian rupee ended at lowest level today since August 28, 2013. The Indian Rupee closed lower by 17 paise at 68.73/$ on Thursday.

The Indian rupee ended at its lowest level today since August 28, 2013. The rupee hit a record low of 68.86 per dollar on Thursday. The rupee crashed to nearly a 39-month low of 68.84 amid sustained foreign fund outflows and the greenback's surge in overseas markets.

The rupee breached the 68.80 mark as upbeat economic data strengthened the prospect for higher US interest rates, while the dollar's bull run continued as US bond yields hovered near multi-year highs.

The rupee has fallen against the dollar since Donald Trump won the presidential election in the US on November 9, 2016 from its 66.43 level, it reached the 68.8325 mark today.

On the global front, Federal Reserve chair Janet Yellen has announced that trump's election has done nothing to change the federal reserve's plans for a rate increase "relatively soon". A rate hike in US will lead to flow of money from emerging markets leaving their currencies and assets vulnerable to the negative risks.

Chinese Yuan is also sinking, with values tumbling to a record low of 6.9378 against US dollar at one point of time yesterday in the offshore markets. US dollar index will witness further gains, with values are expected to hit 105 in the coming weeks. Euro seems to be the most vulnerable, influenced by the uncertainty over Italian constitutional referendum in the first week of December.

The Indian Rupee closed lower by 17 paise at 68.73/$ on Thursday. The local unit hit a high of 68.57/$ and a low of 68.83/$ today.

The Reserve Bank of India’s (RBI) reference rate for the dollar stood at 68.65 while for the Euro it was 72.38. The RBI’s reference rate for the Yen stood at 60.90; reference rate for the Great Britain Pound (GBP) stood at 85.3600.


http://www.indiainfoline.com/article/news-top-story/falling-rupee-depreciates-17-paise-at-68-73-rupee-116112400393_1.html

Thursday 1 January 2009

How do central banks inject money into the economy?

Investment Question
How do central banks inject money into the economy?

Central banks use several different methods to increase (or decrease) the amount of money in the banking system. These actions are referred to as monetary policy. While the Federal Reserve Board (the Fed) could print paper currency at its discretion in an effort to increase the amount of money in the economy, this is not the measure used.

Here are three methods the Fed uses in order to inject (or withdraw) money from the economy:
  1. The Fed can influence the money supply by modifying reserve requirements, which is the amount of funds banks must hold against deposits in bank accounts. By lowering the reserve requirements, banks are able loan more money, which increases the overall supply of money in the economy. Conversely, by raising the banks' reserve requirements, the Fed is able to decrease the size of the money supply.
  2. The Fed can also alter the money supply by changing short-term interest rates. By lowering (or raising) the discount rate that banks pay on short-term loans from the Federal Reserve Bank, the Fed is able to effectively increase (or decrease) the liquidity of money. Lower rates increase the money supply and boost economic activity; however, decreases in interest rates fuel inflation, so the Fed must be careful not to lower interest rates too much for too long.
  3. Finally, the Fed can affect the money supply by conducting open market operations, which affects the federal funds rate. In open operations, the Fed buys and sells government securities in the open market. If the Fed wants to increase the money supply, it buys government bonds. This supplies the securities dealers who sell the bonds with cash, increasing the overall money supply. Conversely, if the Fed wants to decrease the money supply, it sells bonds from its account, thus taking in cash and removing money from the economic system.

To learn more about central banks and their role in monetary policy, check out Formulating Monetary Policy.

http://www.investopedia.com/ask/answers/07/central-banks.asp?ad=feat_fincrisis

Friday 10 October 2008

LIBOR - London Interbank Offered Rate

What is LIBOR?

The London Interbank Offered Rate is the rate at which banks will lend unsecured funds to one another. Based on a survey of global banks, it's the most widely used benchmark for short-term interest rates.

When are LIBOR rates determined?

The British Bankers' Association publishes rates Monday to Friday at 11:00 a.m. London time of varying maturities.

How is LIBOR determined?

Each bank determines how much they will have to pay to borrow money from each other. The number of contributing banks vary depending on the currency.

U.S. dollar LIBOR is determined by 16 global banks, and the final published rate is the average of the middle eight rates.

LIBOR and U.S. interest rates

Historically, LIBOR tends to track the Federal Funds Target Rate. However, as economic uncertainty over the global credit crisis continued and the initial U.S. government-sponsored financial bailout failed, the spread between the two rates widened as LIBOR spiked, indicating a lack of confidence among banks.

LIBOR's relationship to consumers.

LIBOR ultimately determines interest rates on everything from adjustable-rate mortgages and car and student loans to small-business loans and credit cards.


Additional notes

http://www.investopedia.com/terms/l/libor.asp

LIBOR

An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.

The LIBOR is the world's most widely used benchmark for short-term interest rates. It's important because it is the rate at which the world's most preferred borrowers are able to borrow money. It is also the rate upon which rates for less preferred borrowers are based. For example, a multinational corporation with a very good credit rating may be able to borrow money for one year at LIBOR plus four or five points. Countries that rely on the LIBOR for a reference rate include the United States, Canada, Switzerland and the U.K.


http://en.wikipedia.org/wiki/Federal_funds_rate

Federal funds rate comparison with LIBOR

Though the London Interbank Offered Rate (LIBOR) and the federal funds rate are concerned with the same action, i.e. interbank loans, they are distinct from one another, as following:

1. The federal funds rate is a target interest rate that is fixed by the FOMC for implementing U.S. monetary policies.

2. The federal funds rate is achieved through open market operations at the Domestic Trading Desk at the Federal Reserve Bank of New York which deals primarily in domestic securities (U.S. Treasury and federal agencies' securities).

3. LIBOR is calculated from prevailing interest rates between highly credit-worthy institutions.

4. LIBOR may or may not be used to derive business terms. It is not fixed beforehand and is not meant to have macroeconomic ramifications.

Federal Funds Rate and the Discount Rate

The discount rate, in contrast, is usually about a half to a full percentage point higher than the federal funds rate. The Federal Reserve does control that one. The discount rate is the interest rate the Federal Reserve charges other depository institutions for very short-term (usually overnight) loans.