Fed’s Alarm Buzzes


(Federal Reserve vs. Interest Rates)

USA is the largest economic nation and home of the best Stock Exchange together with the best financial institutions in the world up till now. The US has a national wealth of more than $110 trillion and an increasing income per capita of $54,979 annually, which means that either GDP is pushing, or that population is pulling down, well, we all know the answer. However since recent times, the US has been encountering a major issue which is the Interest rates. Why is this rate crucial to banks and consumers falling from quarter to quarter? First, let's take a glance at the economy in the past years.

Past lines

The financial crisis that began in 2007 was the most intense period of global financial strains since the Great Depression and finally led to a deep and prolonged global economic downturn. The Federal Reserve took extraordinary actions in response to the financial crisis to help stabilize the U.S. economy and financial system. Those measures included the reduction of short term interest rates near zero level. The fed also purchased huge amount of long term Treasury securities and long term securities issued by the government.

With that, low interest rates would have helped households and businesses to finance new expenditures and help to support prices of other assets such as stocks and both existing and new home sales.

By doing such moves, data showed that economic activity expanded at a moderate pace in the U.S economy, as labor market indicators pushed higher. Those labor figures were however seen to remain underutilized compared to this period's labor resources. With that, the Federal Open Market Committee (FOMC) outlined that inflation was running constantly below the 2% threshold and has decreased the long term inflation outlooks.

What's happening?

All those debates done by both the Fed and the FOMC led to one conclusion; that the US will not raise interest rates in the short term. Federal Reserve officials are looking for a new way to reassure investors that they are not ready to start raising interest rates, according to an account of the most recent meeting of the Fed's policy-making recently. The Fed stated that the economy is improving and that more Americans are finding Jobs as Jobless claims dipped 1000 for the month of September.

Also, the Fed planned to finish its bond buying campaign at the end of this month.

This statement from the Fed, did not assure the FOMC officials who stated that they were far from satisfied with the economy's recent progress. Moreover, the Federal Reserve sees the need to replace its guidance regarding its plan to keep short term interest rates near zero for a considerable amount of time after its bond buying program. FOMC member Kocherlakota from the Fed Bank of Minneapolis stated that if the economy maintained its present trajectory, it would be inappropriate to raise rates at any point during 2015.

Furthermore, the IMF stated that a prolonged period of ultra-low interest rates poses the threat of a fresh financial crisis by encouraging excessive risk taking on global markets. One of IMF's financial counselor stated that traditional banks were safer after the injection of additional capital, but not strong enough to support economic recovery.

So, what's next?

The Federal Reserve recently held its meeting, whereby which Janet Yellen spoke about future rates regarding the US economy. Following this speech, short term interest rates future were mostly higher as traders now think that Fed will raise policy rates in 2015's fourth quarter, after a perceived dovish sentiment on the recent policy meeting.

Globally speaking, economies worldwide might affect the greenback's homeland. The US Central Bank suggested its concern about the possible

impact of a robust greenback and weakening economic prospects in Europe and Asia on the America economy, something which traders acknowledge might delay when the fed will raise interest rates. Again, following a biased speech by the Fed, the market is trying to price out the first climb as from next year's second quarter. This market is running with the idea that the fed might not be rising interest rates in 2015, making the economy's future highly bearish.

However, it can be seen that the Fed is becoming focused on the potential impact of the stronger dollar on its economy at a time when the global growth momentum is beginning to dip. Moreover, since their meeting, Fed officials have increasingly flagged the dollar's rise as holding back a rebound. While unemployment dropped to 5.9% in September, inflation measures have eased and the International Monetary Fund slashed its global economic growth forecasts.


Finally, it can be seen that Fed is not ready to increase its Interest Rate level for now and that the 2015 forecast might not be as accurate as it seems. Meanwhile, investors would concentrate on data regarding the end of the bond buying program or stimulus. European data on its part might be closely watched by investors due to high relation towards the US economy. Data on a global level should also be considered and also, investors would wish to eye the Gold commodity on the NYMEX for great trading opportunities in the long run.


Warren Tancredi By: Warren Tancredi