Janet Yellen, the Chair of the US Federal Reserve, recently indicated that her organisation could raise the ‘benchmark federal funds rate’ in mid-December 2015.
Federal funds rate
The benchmark federal funds rate is the interest rate at which depository institutions, such as banks, lend funds maintained at the Federal Reserve, the US’ central bank, to other depository institutions overnight. It is one US economy’s most important interest rates, since it effects key aspects of the broader economy including inflation, employment and growth.
The rate is set by The Federal Open Market Committee (FOMC), which is the Federal Reserve’s primary monetary policymaking body. The rate has been held between 0% and 0.25% since 2008; this policy was implemented to aid US economic recovery after the global banking crash of 2007-2008.
Substantial economic recovery
The FOMC will hold its next meeting between 15th and 16th December 2015. Many experts believe that the organisation will vote to initiate a rate hike at this session. Janet Yellen recently gave a speech in Washington D.C., in which she seemed to confirm this belief.
Yahoo News reported that she said the US economy has “recovered substantially since the Great Recession” that followed the global banking crash of 2007-2008. When expressing confidence in the state of the American economy, Yellen cited the recovery of the country’s job market. She added that consumer spending rates have been “particularly strong” over the past year.
Normalising policy stance
Yellen went on to say: “When the committee (FOMC) begins to normalise the stance of policy, doing so will be a testament … to how far our economy has come. In that sense, it is a day that I expect we all are looking forward to.”
Experts have believed that the FOMC would raise the benchmark federal funds rate for a while now. Fed officials first signalled that they would pursue this course of action last month, according to Sky News. The real question is, what impact will it have on the global economy?
Htet Tayza comments
That’s an open ended question, but the answer may depend on what happens to the value of the US dollar. This is the currency that’s used for most international transactions, so anything that happens in the US economy has a substantial effect on global finances.
World Financial Watch says that when the Federal Reserve raises interest rates, the foreign exchange value of the dollar usually goes up as well. The International Monetary Fund warned in July 2015 that this could trigger “significant and abrupt rebalancing of international portfolios.” This would spur market volatility, which could ultimately damage financial stability around the world.
However, The Guardian noted recently that “the Fed’s overriding objective is to lift inflation and ensure that it remains above 2%. To do this, Yellen will have to keep interest rates very low, even after inflation starts rising.” If this proves correct then the effect of a rate hike may be minimal, because it might not lead to an automatic increase in the value of the US dollar.