Why does the Fed want to raise interest rate quickly?
Well, to understand this we have to zoom-out of the details of each economy for a while to see how world countries manage their local economies?
If we take 3 samples from the world economy and let’s pick: Japan, Eurozone and United states
In Japan, Bank of Japan offers (0.10%) interest rate and it maintained a plan to expand the monetary base at an annual pace of 80 trillion yen ($666 billion) from April, 2013
While in Euro Zone, European Central Bank offers (0.05%) interest rate and it announced an expanded stimulus program amounting to €60 billion ($69 billion) a month in asset purchases in an effort to revive the eurozone’s struggling economy till September, 2016
On the other hand, in United states. The Fed. tapered its (QE) stimulus program on October, 2014 and started to prepare the market for first-rate hike after keeping interest rate closer to 0% for years.
Let’s mix all the elements together and keep it very simple ..
Let’s say that these local economies are intersecting in international trade zone. Every economy is boosted by offering new money, low-interest rate and doing its best to keep inflation up to its targets.
In Japan, the inflation started to pick up however, it is not that strong to meet BOJ target till now. The reason behind this is low oil prices which might push BOJ to lower its inflation forecasts or give extra time for its inflation target to be achieved.
While in Europe, ECB just launched its QE program to encourage Eurozone members to revive their economies and between the lines to help Greece to get out its debts without suffering for long time (Read Quote#1). Eurozone still have at least 1 year till we can talk about inflation risk or even discuss whether economy started to pick up or not.
Quote#1: Weakened Euro
Weakened Euro is good for Greece because it implicitly means that Greece’s products and services are much cheaper for the foreigners and for the world. This help Greece to get out its financial problems by boosting up its economic activities. In addition, Liquidation for any foreign assets owned by Greece will get more Euros to Greece (~for example: US dollar saving account, foreign properties and foreign financial instruments owned by Greece worth more Euros than 6 months ago, from EUR/USD: 1.398 to EUR/USD: 1.0480 so, if you’ve 100$ in your pocket, they worth 71.5€ in the past and now they worth 95€)
On the other hand, the US economy is performing better as viewed by the Fed, Employment and home sales are moving forward and thats why they tapered the quantitative easing program. If we look to the US through non-risk taker(s) eyes, they would love to move funds, investments and capital to united states. (Read Quote#2)
Quote#2: Why does Investment move?
Funds, capitals and investments always search for better returns so, the money flows love to go to the higher return zone. In our article, US economy will be attractive economy for the capitals and investments. You’ve higher return on your capital, fund and investments. If you are not a risk taker, your returns in the US might be much higher than any other country.
.. & Early rate hike is good for the US economy
In the american case, the need for a rate hike seems to be so clear in yellen’s words and even in the fed minutes. However, the fed is still not-so-sure about how strong is the US economy and will it survive in a world of slow growth?
Based on the previously mentioned points, we are able to say that early rate hike is really good for the american economy and for the global economy too.
The only concern that we must concentrate on is how good the US economy performance is?
Solid employment, stable home sales and consumer spending backed with reliable data from industrial activities should be enough for the fed to press the hike button. This does not mean that US economy is moving backward. On contrary, Stronger dollar is rational power for the american economy and it opens the gate for cheaper imports and gives american investors better chances in foreign investments.
In addition, US market is not that weak and recent economic data showed that it is performing on a solid base to maintain economic growth for local industries and businesses.
Last thing, Experts are expecting that once US hits its inflation target, this will gradually export inflation to the other countries and thus, help the world to get out its deflationary period
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