INTERESTRATES PREDICTIONS InterestRates Predictions
The FederalOpen Market Committee (FOMC) determines the interest rates in theUnited States. FOMC has several members namely,seven governors of the FederalReserve Board andfive FederalReserve Bank presidents.The core business of Federal Reserve is to ensure financial stabilityis maintained. The Federal Open Market Committee convenes eight timesin a year to resolve financial issues regarding interest rates andmonetary policy. These issues include money supply and its impact oninterest rates and our overall economic trend (Hubbard,& O`Brien, 2016).
Recently, there has been a strong indicator that the Federal Reservewould raise the base interest rate after a span of seven years. Thisgradual change in interest rate variations are expected to continuefor the next three years. Fed Chairwoman JanetYellen said. “We believe we have seensubstantial improvement in labor market conditions and while thingsmay be uneven across regions of the country, and different industrialsectors, we see an economy that is on a path of sustainableimprovement.” Ms. Yellen further emphasized the need to closelymonitor inflationary effects and implement appropriate fiscal andmonetary policies (InterestRate Changes and Share Price Changes, 2015)
There are strong indicators by J.P. Morgan Chase & Co., WellsFargo & Co., andBank of America Corp,America’s major lenders to raise their base reference ratefor several loans including credit-card debt from 3.25% to 3.5%. Fornow, John Bergstrom, chief executive of Bergstrom Automotive, aNeenah, Wis., company with 30 dealerships in the state, said he didnot expect a quarter-percentage-point rate increase to do much ofanything to his business (Lahart,2015). Specific tools areused by the Federal Reserve (Fed) to manage both the monetary andfiscal policies. The Federal Reserve has the ability to increase anddecrease the markdown rate. The interest rate charged onshort-range loans facilitated by regional commercial banks throughovernight lending is called the discount rate (Laubach & Williams, 2016). When the economy is sluggishor slow, the Federal Reserve may endorse its power to decrease thediscount rate in an attempt to make borrowing more affordable formember banks (Hills, Nakata, & Schmidt, 2016)
When banks borrow finances from the Fed at a cheap rate, they passsavings on to banking clients through lower interest rates charged onindividual, car or mortgage loans (Clark& Williams, 2011). This generates an economicsituation that enhances consumer borrowing leading to a boost inconsumer expenditure when interest rates are low.Consequently raised discount rate has a direct impact on the interestrate charged to customers for loans hence consumer expenditure isminimized when this approach is executed(Alvarez, Kehoe & Neumeyer, 2002).
The new financial outlook by FederalOpen Market Committee members predictincrease on the Federal Reserve base rate on a progressive trend of1.375% by the close of 2016, 2.375% by the expiry of 2017 and 3.25%in three years. The Fed has the ability to control the interestrate by applying the above monetary and fiscal strategies
Alvarez, F.,Kehoe, P. J., & Neumeyer, P. A. (2002). Thetime consistency of monetary and fiscal policies.Minneapolis, MN: Federal Reserve Bank of Minneapolis, Research Dept.
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Hills, T. S., Nakata, T., & Schmidt, S. (2016). The Risky SteadyState and the Interest Rate Lower Bound. Finance andEconomics Discussion Series FEDS, 2016(009), 1-51..
Hubbard, R.G., & O`Brien, A. P. (2016). Essentialsof economics.Boston: Pearson
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Lahart, J. (2015). U.S. BanksFollow Fed in Raising A Key Lending Rate. TheWall Street Journal.Retrieved From,http://www.wsj.com/articles/where-the-fed-goes-next-oninterest-rates-1450299396[Accessed on March 3, 2016].
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