Simply, what does the US Federal Reserve raise interest rates mean?
The higher the interest rate set by the US Central Bank, the higher the interest rate automatically on existing and new loans.
As was expected, the US Federal Reserve announced a hike in interest rates on federal funds, at a meeting that was expected from the east to the west of the globe.
The Federal Reserve (the US central bank) raised interest rates by half a percentage point on Wednesday and expected to raise borrowing costs by at least another 75 basis points by the end of 2023. It also predicted an increase in unemployment and a near halt in economic growth.
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The US Central Bank’s expectation that the target interest rate on the federal funds will rise to 5.1 percent in 2023, slightly higher than what investors had expected ahead of the Federal Reserve meeting this week.
And with the Federal Reserve announcing an increase in interest rates by half a percentage point to the range of 4.25% – 4.50%, a question arises about what it means to raise interest rates and what is its relationship to dollar-denominated deposits and currencies linked to it.
What does raising interest rates mean?
Raising interest rates is a criterion that determines the interest rates on loans that banks obtain from the central bank, and accordingly banks set their plans for a new mechanism for calculating interest rates on loans they provide to customers.
The higher the interest rate set by the central bank, the higher the interest rate automatically on existing and new loans, in currencies denominated in or linked to the central currency.
In the case of the US dollar, the cost of lending will rise from today on banks, and therefore on customers, and this is a negative indication for economies looking to stimulate markets by setting low interest rates.
Raising the cost of lending will lead to a decline in the pace of requesting credit facilities in global markets, especially in the dollar and its related currencies.
What is the interest relationship with deposits?
However, the decision to raise interest rates carries a relatively positive aspect for bank deposit holders with banks operating in the markets. The decision to raise interest rates also means that the depositor gets higher returns.
That is, the depositor in the dollar currency, for example, will have the opportunity to strengthen his deposits in order to obtain higher benefits in exchange for depositing them with banks, due to the decision to raise interest rates.
In such cases, many markets are witnessing a rapid rise in customer deposits with the banking sectors, to benefit from rising interest rates, in contrast, the abundance of liquidity within the markets is declining.
This means that bank deposits have become one of the forms of investment for individuals and institutions, by placing them in bank accounts, and charging interest on them on a monthly, quarterly or annual basis.
This is the significance of curbing inflation by increasing interest rates, by reducing the volume of money supply within the markets, and thus consumption and investment decline, and markets reprogram purchasing power based on the available liquidity.