Federal Reserve Hikes Interest Rate Target

Discussion in 'Current Affairs, News and Analysis' started by Not_Whistlin_Dixie, Nov 1, 2005.

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  1. This afternoon the Federal Reserve System announced that it was increasing its target for the interbank overnight loan rate, commonly known as the federal funds rate, from 3.75% to 4%. The fed funds rate is a rate at which banks make short term loans to each other.

    This was the twelfth consecutive increase in the fed funds target rate since June '04.


    The fed funds rate target reached its lowest value in a quarter century, just 1%, in June 2003.

    The Federal Reserve began cutting the fed funds target from 6.50% in January 2001 and continued with a series of twelve additional cuts thereafter.

    Thus, today's increase marks a four-fold increase in the rate for short-term borrowing in about two and a half years.

  2. Fascinating. The long winter nights must fly by at home for you.
  3. NWD , care to briefly explain the globabl implications of a percentage rise in the US interest rate, for those with their heads buried in the sand?
  4. The USA has an ominously large current account deficit which approximately means that it imports much and exports rather little.

    As a result, the commercial banks of the rest of the world accumulate large quantities of dollars.

    The governments and central banks of these foreign lands have an inducement to frustrate the law of supply and demand and prevent the local currency from rising against the dollar. To varying degrees, these countries have large industries dedicating to serving the American export market. Anything, including a falling US dollar, that makes exports more expensive to the American consumer is thus perceived as a bad thing.

    With the passing of time, foreign central banks accumulate ever larger US dollar reserves. Anxiety sets in, so far as foreign central bankers realize that they are tying their countries' fortunes to the US dollar. After all, they must reflect, what happens if the dollar loses most or all of its value?

    We have a sensitive, fragile situation. If any one major US exporter, say, for instance, China, were to start selling off its dollars in the foreign exchange market, it could precipitate an avalanche as everyone else joined in to salvage something from the impending wreck.

    All other things being equal, the higher US interest rates, the greater the inducement to continue holding dollars as AndyPipkin mentioned.

    In my opinion, a substantial consideration behind the current series of increases in the fed funds rate is a desire to avert a run on the dollar in the foreign exchange market.

    If the US dollar should become the next Argentine peso, or circa 1998 Russian ruble, it will rock the whole economic world, not just the USA.
  5. In 2020, the United States will remain the world superpower, with a total GNP of approximately $17 trillion to $18 trillion. Thanks to its dynamic demographics (1% annual population growth), a productivity and a competitiveness amongst the best in the world (currently second in the world and far out in front of Germany (13th) or France (26th) according to statistics from the World Economic Forum), and thanks also to its constant drive to create and innovate, and with flexibility due to the mobility of its labor force, the United States will maintain a clear advantage over China and India and will widen the gap with Europe. With average per capita salaries of approximately $55,000, the income of the average American in 2020 will be 1.5 to 2 times greater than that of a European; five times higher than that of a Chinese and nine times more than that of an Indian (approximately $6,000 per capita).

    I quite selfishly hope that this prediction proves correct so far as my own fate is tied to its accuracy. However I have my doubts.

    We've got

    1. A private pension system that has promised workers and retirees a lot more than it can deliver.

    2. A kleptomaniac government that is spending the country into insolvency.

    3. An administration that likes to pick fights with foreign countries that lack the wherewithal to attack the USA.

    4. The highest levels of per capita total credit market debt and total credit market debt as percentage of gross domestic product in the nation's history.

    5. After-tax, inflation-adjusted hourly wages that have been in decline since 1972 and rather rapid decline within the last few years.

    6. An artificial boom in the prices of real estate and financial assets engendered by a lengthy period of artificially low interest rates as I describe in the first post on this thread. Bubbles eventually burst.

    7. Trading partners who must have a growing conviction that the status of the US dollar as the world's reserve currency is a parasitical gimmick they'd do well to replace.

    8. Staggering increases in the capitalized value of future entitlements liabilities (Medicaid and Social Security) that are not reflected in cash basis accounting of the federal deficit.
  6. in_the_cheapseats

    in_the_cheapseats LE Moderator

    I can't see the US of A being able to stave off the growing might of China. Too many people with too few rights gives it an economic impetus that USA hasn't had in years. It has already outstripped the US in the manufacturing market place and its technology market is accelerating hard too. This is a short term hold for the US only.
  7. Yes but surely it would not be in Chinas short or long term interest to have the USA trigger a global collapse.

    I thank NWD for his excellent summary of the real risks. It's sort of like a slow motion train wreck. Only the timing is in question. For little old me and the rest of the Numnums family we are just working away at clearing our mortgage and clearing our debt. Beyond that what is a good 'Depression Safe' investment? Is there any gold left?
  8. in_the_cheapseats

    in_the_cheapseats LE Moderator

    Correct but it doesn't mean China is going to impede its own growth to help out! The change over will be a gradual one with China taking more and more of the market share. It doen't mean catastrophic collapse of the US economy; rather a gradual decline (if they are realistic and plan as such).
  9. NWD, the article was ma speech by the French Prisident of a German bank. I think he'd have less of an axe to grind and be a bit more qualified to comment than you would. You're not looking beyond the borders of the US. Yes, the US has probelms, but look at the rest of the world:

    EU, Russia and Japan are heading for demographic colapse

    China will actually have an older population that US by 2020 and will soon be running into natural growth restraints.

    US budget deficit is actually lower than most EU countries. In fact, if it were in Europe, US would be one of the few to meet the Euro 'convergence' criteria.

    US has one third of global coal reserves. If it could be bothered, it could replace oil with coal pretty quickly.

    There are many more issues I could raise. However, in general, it's pretty clear the US will remain top nation for the forseeable future, with China gradually catching up, unless it implodes. Europe will fall further behind both.