The Federal Reserve kept the interest rate at 0.25 percent during the meeting held on February 28th and said it would be patient in deciding when to raise interest rates. Interest Rate in the United States averaged 6.04 Percent from 1971 until 2014, reaching an all time high of 20.00 Percent in March of 1980 and a record low of 0.25 Percent in December of 2008.
For Irving Fisher, “the determination of the interest rate may be reduced to a single problem of geometry” (Fisher, :The Theory of Interest, Macmillan, 1930, pp. 231-232) In terms of Cartesian coordinate, the x-axis measures this year’s income, and the Y-axis, measures next year’s income, and a point in the plane determines both years income, whose ordered pair combines both years income stream or income position. To add another year's income would put you in 3-dimension. Given the level of the interest rate (high vs. low) an individual may be willing or not willing to lend or borrow income between now and the future on a Market Line. Fisher may have given the best scientific way to explain the interest rate.
For John Maynard Keynes, the situation is different, the real interest, and not the one that the FED manipulates, is determined endogenously when all the sectors—labor, money, goods and service, and production of the macro economy are in equilibrium. It appears that the FED’s low interest rate policy was used to bring the economy out of the Great Recession, but as it approached zero, the economy was still in a bind, indicating that a situation of interest inelasticity appears to exist. So the FED remained committed to keep the nominal interest rate low, and sought other policy such as stimulus money, and Quantitatice easing to do the job. But a situation of liquidity trap seems to exist. So I think the rate will have to go up, back to the equilibrating level, but by how much and when is to be determined. Some, such as John Taylor will use the Taylor rule to calculate the amount. From the cultural point of view, I think that the rate is bounded below at zero, say by Sharia laws, and above say by Usury laws.
If Fed increases rates of interest, it could cause a swing in exchanges market. In fact, dollars demand curve shifts right changing equilibrium; so, us dollar will appreciate relative to the euro (for example). In this way, imports become more affordable, while exports become more expensive. In addition, debt cost could increase because of interests rise for new issues.
One of the outcomes of increasing interest rates is putting more weight in consuming tomorrow (future consumption) with respect to consuming today (present consumption). That is something Govt do sometimes in order to cool down a warmed economy where aggregate demand may exceed aggregate supply causing a generalizaed increase in prices (inflation). High interest rates may encourage peole to save money and invest more. in addition, as somebody said before, people will prefer to have more US dollars as it will receive more gains from lending money nominated in this currency rather than nominated in other currencies (euros, puonds, yens) that may be paying less interest. This will cause an appreciation of the dolar with regard to other currencies as aggregate demand for USD increases. This leads to making US exports more expensive and imports cheaper. An it will increase the costs for people that borrowed dollars.
It is worth remembering that monetary policy in the USA means exchange rate policy in the rest of the world. This answers your question.
I wonder about the unprofessional habitus of some of the members of this forum. Is this about economics or about the use of power by individual countries? The power of the US Fed, for instance, comes from the economic strength of the US. Germany could dominate the European Monetary System, the predecessor of the European Monetary Union, because of the (n-1) problem which says that n countries have only (n-1) independent exchange rates (i.e. one country is free to choose as it wishes and the burden of a fixed exchange rate regime is not shared equally). Arab countries used their oligopoly power on oil to drive up the oil price to levels that ruined many developing countries (not just the world economy as a whole). For many year, Egypt has used its pivotal position in the Arab League to push through its own policies. And the list goes on.
The US Fed like any other central bank has the right to do what is best for its own country.
Mohamed, I guess you mean a dollar appreciation (for which we say in international economics that the exchange rate goes down, i.e. the dollar - foreign currency rate goes down). Indeed, imports become less expensive then and that does have some advantages for the US. However, their exports become more expensive and their competitiveness worsens.
In the past, the US was criticised for allowing the dollar to depreciate based on an expansionary monetary policy, i.e. for inflating away its debt.
So, is it nice to criticise the US for anything it does, no matter what? It is funny when somebody with a one-sided view of the world accuses somebody else of naivety.
Furthermore, why would the dollar appreciate? You have not said anything about that. The US policy with such a low interest rate is rather expansionary. It can only lead to an appreciation because other countries do an even more expansionary policy.
I guess it does not matter for you. Anything they do is good for criticism. - said by somebody who has lots of things to criticise about the US. But I do not like blind, or should I say naive, criticism. Hatred sometimes obscures a clear vision.
I do not like blind, or should I say naive, criticism. Hatred sometimes obscures a clear vision !!!!
What Fed Officials Are Saying About a September Rate Increase
http://graphics.wsj.com/gallery/fed-officials-on-a-september-rate-increase
You're absolutely right Dr. El Naschie.Thanks for the interesting post
- Badges
- Science topic
- Similar topics
- Geoscience
- Asia
- India