FED RATE HIKE AND MY MONEY

This article is totally different from your present scenario. As I am always looking futuristic view with economy because it is nothing but my money.

Fed rate hike -hot topic now .why it is important why I know these things? How I related to it?

The answer is you are not related but it relates to you. In economics every thing is related to you in complex way.

Don't just scroll but read......

what is the relation between fed rate and my pocket.

I am not deep with the concept of fed rate coz it will take at least a week to discuss. so I just give you the outline and proceeds.

What is fed rate?

The interest rate at which banks and other depository institutions lend money to each other, usually on an overnight basis. The law requires banks to keep a certain percentage of their customer's money on reserve, where the banks earn no interest on it. Consequently, banks try to stay as close to the reserve limit as possible without going under it, lending money back and forth to maintain the proper level.

How it works:
Like the federal discount rate, the federal funds rate is used to control the supply of available funds and hence, inflation and other interest rates. Raising the rate makes it more expensive to borrow. That lowers the supply of available money, which increases the short-term interest rates and helps keep inflation in check. Lowering the rate has the opposite effect, bringing short-term interest rates down

Why Fed has decided to increase the Interest Rate after almost a decade.

1. The number of Americans filing for unemployment benefits have reduced over the last five months. It was the 41st straight week that claims that unemployment remained below 300,000, a threshold associated with strong labor market conditions. That is the longest such run since the early 1970s.

2. The other factor that contributed to rise in interest rate is the low inflation.

How it will impact our economy?

Investors borrow in low interest currencies, leverage their positions and invest in other risky assets around the world namely other currencies, stocks, commodtities etc. Each asset class is assigned a risk premium. This is the extra return investor expects in taking that risk investing in that asset class, say indian stock markets and so on. This way of investing is known as 'carry trade' . Borrowing in lower interest rate currency, leverage and investing in other asset classes. 

When US increases interest rates, investors evaluate the whole set of things. Carry trade try to get liquidated as much as possible. They dispose off risky asset clases, deleverage and repay. This process will set off a selling spree in the asset classes. Sudden outflows cause temporary mismatches in curreny positions, causes currency depreciation,  aggregates selling across asset classes. 

2. Worldwide there is always a universal demand for US dollars. When interest rates are increased in US, this causes liquidity of  dollars to dry or diminish. The external commercial borrowings of corporates in India will face pressures for repaymemt of principal and interest payments.  

Individual country's currency depreciation vis a vis USD holds the key to the enormity of effects on increase of interest by US.

Most important points to consider.

Last 2 days the USA wall street records high becoz of this.
Now it open with flat for waiting the meet outcome.

The interest rate hike is like ours. When the interest hike normally they wants to hold our money within the country. Hold the people money within the country.

As we encourage fii invade in our market at the time the interest rate is lower. So they can use "CARRY TRADE" for investing some good market like india. You just refer our market trend in 2014 Dec which was saddened rise.

When demonitation takes place some how investors predict that the fed rate hike. So they try to convert their position and may be went to native.

Minority stocks falls MF Hit bad. However the thing is now more complicated with agreement on CRUDE OIL with OPEC and NON OPEC.

Already crude oil price is increasing with above statement. As us point of view they want to reduce inflation in basic. that will control DOLLER restrictions. So if I want DOLLER for some purpose I pay more money.

The value of Indian rupee may fall coz of import. Our govt taking steps to restrict the gold purchase (import only).crude oil is on another hand we can't do any thing.

My pocket:
I may spend more for fuel.
Import costlier.
Trade deficit.
Inflation may be arise.

All other factors which is related to import & fuel is affected.

Thank you.