Is America recovering from its economic recession? The increase in Federal interest rates seems to indicate so. The Fed in its press release noted that all economic indicators (household consumption, business expenditure, inflation) are improving and it seems time to increase the interest rates for the first time after the 2008 financial crisis and resulting recession. It further noted that the labour market has improved by reduction of unemployment and underutilisation of labour. The raise in rates is in the range of ¼ to ½ percent.
How does the Fed implement a rate hike? The Fed undertakes specific measures to raise data. On the basis of the reports the Federal Open Market Committee (FOMC) has access to, the Fed sets out on a particular plan of action.
This is explained quite succinctly in its press release, How will the Federal Reserve ensure that the size of its balance sheet won’t lead to excessive inflation?
“When economic conditions and the economic outlook warrant a less accommodating monetary policy, the Committee will raise its target range for the federal funds rate. During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances. In addition, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate.”
The rate hike is good news for savers. Prevailing low interest rates were hardly an incentive for saving. Saving account holders got minimal returns for saving money. There was no impetus to hold money, only to spend it. Those who would like to save can do so now with an expectation of better yields on their investment. Certificates of Deposits (CD), Savings Bonds, Treasury Bills and Saving Accounts are some of the avenues.
Low mortgage rates had fueled an increase of purchases in the home segment. New buyers of homes could look at moving from variable rates to fixed rates of interest as the Fed is likely to further increase interest rates in the long term. A lock in would be beneficial for home loan recipients.
Credit card holders who have been enjoying low interest rates will now need to monitor their purchases more stringently. This is true of those who have undertaken business loans as well. They can expect a higher fee to pay for money borrowed.
Critics of the hike predict a fall in consumption and an outflow of money from emerging markets to the US. The Fed has promised a wait and watch policy and incremental increases in interest rates. It appears that the US economy is on its way to good health as the Fed starts to extubate the economy from cheap monies.
