Tag Archives: Financial Crisis

Federal Reserve Expected to Raise Interest Rates Wednesday

The U.S. Federal Reserve is widely expected to vote to raise a key interest rate for the first time in nearly a decade when it meets on Wednesday, according to multiple published reports.

The effects of such a vote could have wide-ranging implications throughout the economy, affecting things like interest on savings accounts, mortgages, auto loans and credit cards.

The rate the Federal Reserve is considering raising is called the effective federal funds rate. It deals with how banks borrow money from one another, thus setting a bar for all other lending.

The rate has been close to nothing since 2008, during the Great Recession. The rate was at 5.26 percent in July 2007, according to the Federal Reserve Bank of St. Louis, but the bank lowered the rate nearly every month through the end of 2008 to help jumpstart a struggling economy.

The rate has not been raised since that. In fact, it hasn’t been raised at all since June 2006, when the Federal Reserve raised it to the 5.26 percent level at which it stood until the recession.

But the economy is in better shape than it was during the recession. The civilian unemployment rate is down to 5 percent, according to the Federal Reserve Bank of St. Louis. In 2009, after the fallout from the financial crisis, it reached 10 percent. That was its highest level in 27 years.

Why is the Federal Reserve even considering raising the rate again? Essentially, the bank needs to find a balance that ensures the economy stays stable and healthy.

The Washington Post reported that if the Federal Reserve waits too long to raise the rate, it could create bubbles in the stock market or rampant inflation, where prices rise at a rate that employee wages aren’t able to match. But if the Federal Reserve hikes the rate too early, it could jeopardize the recovery — especially if people can’t obtain affordable loans for what they need.

A vote to raise the rate is seen as a vote of confidence for the economy. CBS News reported if the Federal Reserve doesn’t act Wednesday, especially because just about everyone on Wall Street is expecting it to, it could lead to a decline in the stock market because it would suggest the bank’s policymakers think the economy couldn’t cope with a rate increase, even one that’s fractional.

And any rate increase is expected to be slight. CNN reported that the Federal Reserve is expected to raise rates slowly, from its current level of about .12 percent to a new level near .25 percent. Any effects on the economy aren’t expected to be felt for several months, according to the report.

Still, some question the timing of the increase and whether the economy is truly as healthy as evidence suggests.

Goldman Sachs: The Third Wave of 2008’s Financial Crisis is Coming

In 2008, the U.S. real estate and investment banking collapsed, resulting in a financial disaster that is returning in a third wave.

Goldman Sachs analysts led by Peter Oppenheimer stated that the new crisis is characterized by a triple-whammy of rock bottom commodities prices, China’s stalling growth and other emerging markets economies, and low global inflation. The triple-whammy is a result of the banking collapse and European sovereign debt crisis, what experts call a debt supercycle that has taken place over the last few decades.

During the first two debt-fuelled crises, central banks all began to lower interest rates, encouraging investors to lend in emerging markets like China for a decent return. However, now that interest rates may be on the rise, lenders are pulling out of commodities.

During the first wave in 2008, the same situation happened along with the crash of the U.S. housing market. The low interest rates were put into place to grow credit and increase leverage, particularly in China. Combine this with China trying to escape the middle-income trap and the plunge of global commodity prices, and a new crisis is not very far away. At best, the situation would be a painful readjustment period for China.

The global economy will soon slow down thanks to developed economies raising interest rates. The raised rates will also apply to safer assets such as government bonds, which gives investors less incentive to take risks overseas in emerging markets. Without the investments, emerging market companies can’t fund big projects, which in turn, slows down the global economy.

What makes the situation even worse, is that recovery from the crisis is continuously stalled due to the different stages of the economy interacting with each other. In 2010 and 2011, the EU sovereign debt crisis derailed the U.S. economic recovery.

What will it take for the world to recover from the financial crisis? All excess lending in emerging markets have to be worked through, and investors will have to take losses.