Fed Increases Benchmark Rate: Aftermaths For Local as well as Global Consumers

The Federal Open Market Committee, policy making body for Central Bank of the world’s largest economy, The Federal Reserve Bank, has increased the benchmark short term rate by a quarter points, on Wednesday. This is for the first time; the US central bank has raised its rate within a decade and in such a moment when economies of China, Europe and Japan are tumbling with spate of negative news centering respective economic growth.

The Federal Reserve Bank has kept the benchmark rate nearly zero since 2006. Miscellaneous loans such as mortgage loans, car loans, credit card loans, are disbursed on this benchmark rate. Wall Street is believed to witness sliding indices as observed earlier, reports BBC .

Through the support of extraordinary measures, adopted by the policy markers, US economy has surpassed the global recession and become able to create 500,000 new jobs during October and November. Most policy makers have expected to raise rates before the end of the year. Strong economic growth during the last two months has provided the opportunity to stick on rate raising plan, reports Bostonglobe quoting Ms. Janet Yellen, Chair Woman of the US Central Bank.

Not only the US Central Banks but around the globe have slashed interest rates to near zero and created billions of pounds of support for governments and the wider economy. After around a decade, the US citizens have been provided with an opportunity to pull out from ‘Zero (0)(Interest Rate) World’ which turned to be a ‘Negative (Interest Rate) World’ for the countries in Eurozone.

Stronger Dollar means the emerging market governments have to repay more in local currencies since the lending amount is usually denominated in dollar. Investment capital will get more popularity in the Atlantic and away from Asia in the hunt for better returns. However, stronger dollar appears to be a boon for the European and Asian businesses since it makes export to America cheaper.

Though not directly linked with Fed benchmark, long term debts like mortgages will hugely be influenced with the rate hike. As short term rate has been raised, long term rate will go up gradually too. Car loan, student loan and other mid term loans will also be affected with the short term rate hike, reports NPR quoting Megan Greene, Chief Economist at John Hancock.

Credit Card debt as well as other short term debt will observe a huge blow. An American is indebted for credit card loan of around $7000, on average and usually depends on it to cover daily expenses. Fed’s Wednesday’s decision may have a little immediate effect on short term debt like credit cards, but gradual increases in rate may eventually suspend ability of the consumers to pay for bills.

Federal Open Market Committee, policy making body on behalf of Federal Reserve Bank, central bank of the world’s largest economy, has started to approach through a new path after around a decade with announcing its decision to raise short term benchmark by a quarter points. The rate hike will directly affect the short term debt holders while mid and long term borrowers will suffer with its gradual aftermaths.