US Federal Interest Part 1

In this topic i am going to talk about 3 things.
  1. US Federal Interest outlook – Is Dec the month to hike the interest (part 1)
  2. US Federal interest impact – How does it affect the economy and most importantly, us as Investors (part 2)
  3. How can we leverage on this opportunity (part 3)
  1. US Federal interest outlook
On September 15, 2008, Lehman Brothers firm filed for Chapter 11(US bankruptcy code) bankruptcy protection following the massive exodus of most of its clients, drastic losses in its stock, and devaluation of assets by credit rating agencies. This resulted in a great impact to the US financial institution and its economy. The US stock market led the global market into a great plunge and a global economy crisis occurred. To help the US economy to recover, the US federal reduced its interest rate from 4.75% to 0.25% (25 basic point) on 12-16-2008.
Since then, the US federal has not changed its interest rate and due to that change of policy, depository institutions (bank and credit unions) borrowed a big lump sum of money from the US federal and recovered from the crisis. With “cheap” money flowing into these banks, they are able to give a low interest rate to a lot of big company out there. On top of that it also affect global centre bank, due to the adjustment, every country adjust their federal reserve interest accordingly and this help the whole world economy to recover. As it encourage company and a lot of institution to borrow large number of money (as the bank now able to give lower competitive interest rate due to they have the lowest interest rate in a decade) and they use the money to leverage and grow their business. With the company grow, they will need more employees to help them expand their empire and this cause those company hiring an enormous number of employees. This create more job opportunity and better salary. With more people have job and living standard increase, it help the economy to move too. As a consequences, It grow the supply and demand exponentially.
A lot of country also keep US dollar as a reserve and use it to trade with the world.
There are four money markets in the world having interbank offered rate fixings in USD, including:
Libor fixed in London
Mibor, or MIBOR (Mumbai Interbank Offered Rate) fixed in India
Sibor, or SIBOR (Singapore Interbank Offered Rate) fixed in Singapore
Hibor, or HIBOR (Hong Kong Interbank Offered Rate) fixed in Hong Kong
The USD Libor in London is the most recognised and predominant one. The USD Sibor was established in January 1988, and the USD Hibor was launched in December 2006. Although these fixings in USD use similar methodology by fixing at 11:00 am at their local times, the results of the three fixings are different.
This create a strong dependencies of inter relation of US currency with other currency. On another hand this also mean that the appreciation and depreciation of US dollar has an impact to their relation. If US federal interest rate hike, it mean the federal now have higher return on their lending cost. This mean the reserve money will go up and increase. Thus, US reserve will go strong. It will help US dollar to appreciate. To maintain the same relation, other country will have to do the same things, hike their interest so the dependencies can be maintain, if not other currency will being affected and go weak against US. If everyone hike their interest then it will affect their own country bank and credit union thus affect the company. This affect the whole chain of economy.
So what if US federal don’t increase the interest rate? As it has been 7 years..the longer the interest rate stay near to zero and create more cheap borrowing the reserve soon will run out of money supply. To sustain the money supply they will have to print more money and this will cause US dollars to depreciate further.
This mean that federal reserve have to hike the interest rate but just matter of time. Their next meeting will be on 15-16 Dec. The chances of the federal reserve interest rate hike is very high on dec. I give the probability as high as 90%.
This is because as you can see from the above graph..if federal reserve don’t hike the interest rate this will be in history the first time in full presidential period (Barrack Obama) no adjustment of interest rate. This is unlikely to be happen. This mean that only left until 2016 end of Oct that they can do that. As Tuesday, November 8, 2016 is the  58th quadrennial U.S. presidential election. They can’t afford to have any financial crisis happen during that point of time, year of 2016, at least Democratic party (Barrack Obama) party won’t allow this happen. This left them no choice to hike only this year.
Why i relate financial crisis with the hike of interest rate? I will continue the sharing on the next topic on US Federal interest impact to the financial instruments (for example stock).

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