Question

1. Consider the historical level of interest rates and its current level today. Comment on the following:
   1. What would the impact be of a rise in long term interest rates be on savings and investment in the US?
   2. Should the Federal Reserve try and raise interest rates even more?

Answer 1

Answer:

A. What would the impact be of a rise in long term interest rates be on saving and investment in the US?

Rising interest rates are considered bad news for stock markets. They see the cost of borrowing increase for consumers and businesses, which reduces spending on goods and services.

The US has increased rates off the back of improving economic conditions, which should create a positive environment for companies to profit. When the Fed increases rates, it typically works to reduce inflationary pressure, and appreciate the dollar.

Rate rises tend to affect sectors in different ways. For example, some company shares are able to thrive in an environment of rising rates, with financials often tending to perform strongly. Banks may see their margins benefit from a rate rise.

However, any rise in US rates may see some shares suffer, such as technology and consumer discretionary stocks, with consumers and businesses having less spare cash to spend.

At last i can say that Interest rates affect the economy by influencing investment. However it is important to understand that there is generally a 12 - month lag in the economy, meaning that it will take at least 12 months for the effects of any increase or decrease in interest rates to be felt.

B. Should the Federal Reserve try and raise interest rates even more?

Federal reserve officials raised interest rates for a third time this year and reaffirmed their outlook for further gradual hikes well into 2019, risking fresh criticism from president Donald trump.

The quarter point increase boosted the benchmark Federal funds rate to a target range of 2 per cent to 2.25 percent.

Higher US rates, though, may force more emerging markets to tighten monetary policy to defend their currencies at a time when investors are punishing those with fault lines such as large current account deficits.

The Fed often adjusts rates in response to inflation the increase in price that happens when people borrow so much that they have more to spend than what's available to buy.

At last i can say that the fed tries to influence that charge called the Federal funds rate and it's what they are targeting when they raise or cut rates. when the Fed funds rate rises, banks also hike the rates they charge consumers, so borrowing costs increase across the economy.