Finance

Fed Interest Raise Consequences

Federal Open Market Committee has issued a press release lately. It states that due to a economic growth the interest rate is raised to the range 0.25 to 0.5% (it was in the range 0-0.25%).

Why this information is so important

insight on rate increaseThe interest rate determines the price of the loan (evidently). Such a slight raise will not change the cost for commercial credits much. However, the rate determines the cost of debt servicing. And it’s evident again that the debt was constantly growing in the recent years and has reached a huge level.

Of course, it doesn’t matter how much you owe if you don’t have to return your debt immediately. But if the cost of servicing your debt is high than you’ve got a problem. There was no trouble before since due to the minimum rate the maintenance cost has been relatively affordable. But now when the rate is beginning to raise…

Reasons behind US Fed’s move

Federal Reserve had to increase the interest rate because they have announced the end of previous crisis recently. Thus, there’s a need to reinforce such a declaration, even if it’s false. If they had not done that, people would have understood that there was no growth at all. That would have produced real problems like consumer sentiment decrease.

Besides, official statistics department has shown figures of outperformance in terms of economy, especially for the unemployment. Of course, later on they will recalculate those figures and they will be absolutely different, as the always do. But no one will get to know about it. Federal Reserve is well aware of such a scheme (like everybody else in the financial world). But the rules of the game prescribe what you have to demonstrate in public if you are an authority in the USA.

At the same time, if rates had been uplifted higher that would have caused a critical increase in debt service costs. In its turn that would have lead to mass bankruptcy – something not to be allowed. What Fed is doing – is balancing between delaying the rise and making it real – simulating. Formally, there is a rise, but in fact the increase will not be fulfilled.

Consequences

There is a chance that new expensive debt accumulation will be slowed and provide some time for another kind of action. May be they are expecting for the cheap capital inflow as IMF has recommended to devalue currencies in the developing countries. At least, they can lower rates again based on the external reasons they choose – they will find as many as they like if they need to.

If Fed doesn’t raise the rate again, nothing special will happen. The credit tightening will not be noticeable at all or its influence will not be significant (if any). But if they do… That’s the end!

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