Financial Markets: Federal Reserve Interest Rate and Economic Impact

This report provides an analysis of the Federal Reserve's monetary policy, focusing on the impact of interest rate changes on financial markets and the broader economy. It examines the Federal Open Market Committee (FOMC) decisions, the effects of interest rate hikes and decreases, and the relationship between interest rates, inflation, and economic growth. The report discusses the ripple effects of interest rate changes on borrowing costs, consumer spending, business investment, and the stock market. It also explores the influence of economic indicators such as the Producer Price Index (PPI) and the Consumer Price Index (CPI) on the Fed's interest rate targets. The report concludes by highlighting the key takeaways and implications of the Fed's actions on financial stability and economic performance. The report also includes references from various books and journals to back the findings.

Running head: REPORT 0
Financial institution and markets
APRIL 5, 2019
STUDENT DETAILS:

REPORT 1
Introduction
The financial media and investment communities have a tendency to possess over interest
rate, the costs paid by someone to use the money of others along with good reasons. While
the Federal Open Market Committee (FOMC) fixes the targets for federal fund rate on that
bank borrows and advances to others, then this has the ripple effects over the whole economy
of the USA, not to state the stock market of USA. Besides, when it normally considers
minimum twelve months for the reduction and increase in the interest rate to be felt in the
extensive financial way, the reaction of the market to the changes is every so often more
direct. In the following report, the view of the Federal Reserve to raise interest rate again in
the late year 2018 and in the year 2019 or in upcoming periods. This report also states the
indicators of positive economic health. In the following parts, numerous monetary tools,
policies, and sternness of consequences and efficiency of the countermeasures on the
financial market and economy are evaluated.
View of Federal Reserve to raise interest rate in the upcoming period
The Federal Reserve in USA brought the 3-year drive to constrict the fiscal policy to an
unexpected termination, ending the forecasts for the interest rate hike this year amongst the
signs of the financial go-slow, and saying this will end the stable decline of the balance sheet
in month of September1. The processes, declared following end of 2 days strategy meeting,
mean steady and sometimes restless effort of Fed to return fiscal policies to more normal
footing would end well short of what was predicted in end of 2015, while central bank
initially shifted rate from the near-zero level taken in relation to financial disaster and
collapse between 2007 and 20092.
1 Gavyn Davies, Why the Fed means business this time (Cambridge University Press, 2018)
2 Iiam Klimova, Inflation rate (Routledge, 2017).

REPORT 2
Having reduced growth of USA, redundancy and inflation projections, it is said by
policymakers that the fed fund rate or interest rate of Fed, was probably to stay between
2.25% and 2.50% minimum over this year, the general shift of the viewpoint. Fed fund rates
are nowadays perceived reaching at 2.6%, earlier in the year 2020, approximately the
percentage points lesser than the remarkable average for an interest rate of Fed and the
indicator that the economy of USA has entered the more inactive period. In the oppositions of
forecasts over much of previous year, the policymakers no more look the requirement to
move Fed fund rate to the limited level as the protector against price rises that remains stayed
below two per cent target of central bank3.
Moreover, in respect of interest rate, the different Fed fund rates knocked the various hikes
anticipated this year to zero from two forecast in a month of December, finalising the pivot to
the less violent policies in a face of an obvious jump in financial risk. Minimum nine of the
17 policymakers of Fed decreased the viewpoint for the fed funds rates, the moderately great
number4.
Furthermore, it can be said that the increment in the Fed interest rate will not influence the
stock market5. However, the major direct influence is that it will be difficult for the banks to
borrow from the Fed. It will be expensive for the banks to borrow money from the Fed.
Although, as discussed above it can be said that rises in Federal funds rate have the ripple
effects. The reason is that this costs them more for borrowing, the financial institution
frequently increases the rate charged by the customer for borrowing. The people are
influenced over increases to the credit cards and mortgage interest rate, particularly in the
case where the loan carries the variable interest rate. It has an impact on reducing the amount
of money consumer may expend. In spite of everything, the individuals are still required to
3 Wenxin Du, Tepper Alexander and Verdelhan Adrien, Deviations from covered interest rate parity (Oxford
University Press, 2018)
4 Andrew Gibson, Impacts of increasing the interest rate (Pearson Australia, 2015).
5 Methew James, The monetary policy (Springer, 2018).

REPORT 3
make the payment of the bill, and while these bills become costly, families are left with
less non-refundable income.it states that the human being would expend less unrestricted
money that would influence the profit and revenue of business6.
Nevertheless, the business is influenced in a more direct way as well. The reason is that the
companies also borrow cash from the bank to operate and expand the operation. At the time
when the bank makes borrowing very costly, the corporations may not borrow as much and
would make payment at a high rate of interest on the loan. In the addition of this, fewer
businesses spending may slow the progress of an entity; this may restrain the developed
planning or new venture, or even persuade the reductions. There may be a reduction in the
earning as well, which, for the public corporation, normally means stock prices take the hit7.
Additionally, While the Fed fund rate is low, the business and people tend to request more
loan. The bank loan rises money supply in the fractional reserve banking systems. As per the
quantity theory of money, the rising money supply may lead the inflation. On the other hand,
the lower interest rate may lead to more inflation. The high-interest rate tends to low
inflation. It is the very simple version of the relations, however, this states that why interest
rate and inflation incline to be interrelated in inverse manner8.
The Federal Open Market Committee (FOMC) meets 8 times every year to evaluate the
financial condition and economic position and agree over the monetary policies. The
Monetary policy is the action taken that influence the accessibility and cost of credit and the
cost of money. In the meeting, the short-term interest rate target is decided. With the help of
positive economic health indicators like the Producer Price Indexes or PPI and the Consumer
Price Index or CPI, the Fed would develop interest rate target projected to preserve the U.S.
economy in the proper balance. Through shifting interest rate target down or up, the Fed
6 Esteem Martin, The effects of lower interest rate (Oxford University Press, 2014)
7 James Baxter, The Positive Economic health (Springer, 2016).
8 Niel Andrews, the Federal Open Market Committee (Cambridge University Press, 2016)

REPORT 4
makes an attempt to attain the target constant price, employment rate, and constant financial
development. The Fed would raise the Fed funds rate or interest rate of the Fed for reducing
the inflation and for decreasing the rates to spur the financial progress. The trader or investor
keeps the close eye on the Federal Open Market Committee rate decision. Afterwards, every
meeting of the Federal Open Market Committee, the declaration is conducted in respect of
the decisions of the Fed to rise, reduce, or keep the major interest rate. In addition, some
marketplaces can shift in advance of projected changes in interest rate and in reply to a real
declaration. For an instance, the U.S dollar normally assemblies in reply of the interest rate
rise, when the market falls in relation to rate’s hike9.
Conclusion
As per the above analysis, it can be concluded that fundamentally, by increasing the Fed
funds rate or interest rate of Fed, the Fed makes attempt to shrink the funds of money
available for buying or conducting thing, by forming money more costly for attaining. On the
other hand, while this reduces the federal funds rate or interest rate of the Fed, the Fed is
raising the supply of money and, by creating this cheap for borrowing, inspiring expenditures.
In the addition of this, the central banks of other nations including Fiji do similar and related
things for similar reasons.
Bibliography
A. Articles/ Books/ Reports
Andrews, Neil, the Federal Open Market Committee (Cambridge University Press, 2016)
9 Rien Robert, The Fed Rate Hike and the Market Outlook (Routledge, 2017).

REPORT 5
Baxter, James, The Positive Economic health (Springer, 2016).
Davies, Gavyn, Why the Fed means business this time (Cambridge University Press,
2018)
Du, Wenxin, Alexander Tepper, and Adrien Verdelhan, Deviations from covered interest
rate parity (Oxford University Press, 2018)
Gibson, Andrew, Impacts of increasing the interest rate (Pearson Australia, 2015).
James, Methew, The monetary policy (Springer, 2018).
Klimova, Liam, Inflation rate (Routledge, 2017).
Martin, Esteem, The effects of lower interest rate (Oxford University Press, 2014)
Robert, Rien, The Fed Rate Hike and the Market Outlook (Routledge, 2017).