What effect does interest rate have on an economy?

Discussion in 'Trading' started by dazed101, Jun 29, 2006.

  1. dazed101


    With the recent interest rate hike, is the economy expected to grow or fall?

    would the dollar decline in value when interest rates are raised?
  2. brasco


    Hiking rates is the Fed's way of slowing the economy, which in turn will slow inflation. Higher rates make borrowing more expensive and saving money more lucrative.

    Since rate hikes slow inflation, and inflation makes the dollar worth less, that means the dollar tends to appreciate in the face of rate hikes.

    As far as the dollar's behavior today (biggest selloff in 2 months!!) reduced expectations for future rate hikes were the culprit.
  3. dazed101


    seriously, what the heck happened today to make the dollar plunge so much!
  4. brasco


    Just the utterances of the most powerful man in the world, Ben Bernanke. All it takes is a marginally weaker statement and look what happens.
  5. Albrady


    Scene 7: The Dollar in Crisis

    In 1994, the Federal Reserve started to increase interest rates for the first time on February 4 to "head off inflation." It was noted by USA Today in March that "Inflation hasn't been a problem for 12 years and it's not likely to be in the foreseeable future." In response to rising interest rates, the dollar dropped to 102.85 on the yen (despite a bid by the Bank of Japan to prop up the currency) and to 1.6750 deutsche marks. The stock market dropped 352 points or 8.8%, and bonds rose to 7.10% from historic lows.

    On April 29, the United States faced with a potential "dollar crisis," stepped in to the foreign exchange markets to halt the drop in our currency. "We came to the brink of a dollar crisis" said David Jones of Wall Street broker Aubrey G. Lanston & Company. The Baltimore Sun reported the rescue of the dollar as follows: "The United States teams up with the Central banks of 16 nations yesterday to buy billions of dollars in a global campaign designed to show investors that the Clinton administration is serious about maintaining the value of the ailing U.S. currency."

    Although throughout 1994 the Fed said they were raising interest rates to control inflation, a number of articles highlighted a capital outflow from the United States as being the fundamental problem.

    Economist Paul Craig Roberts wrote: "Since Mr. Clinton has been president, tax rates have gone up, interest rates have gone up, the price of gold has gone up and the exchange value of the dollar has fallen..." He went on to say that the tax increase discouraged some investors who moved some of their capital abroad..." (WT, 5/13/94). These events fulfilled a warning he gave on June 10, 1993, "When Mr. Clinton's growth-killing taxes hit the economy, the deficit will swell...the dollar will take a big hit as people move out of dollars and dollar-denominated assets and the dollar prices of gold and foreign currencies rise. The price of Treasury bonds will sink, pushing up interest rates. Rumors will spread that the Japanese will no longer buy our bonds or Arabs accept dollars in payment for oil" (emphasis added).

    Business Week quoted Federal Reserve Governor Lawrence B. Lindsey, who said on May 25, "One cannot imagine New York retaining its role as the world financial capital if the dollar did not retain its leading role as a world currency" (BW, 6/6/94).

    In the May 9, 1994 Wall Street Journal, there was a very interesting article which the writer almost missed since there was no headline to really explain what the article was about. It stated, "This summer a private commission headed by Paul Volcker, the former Federal Reserve Board chairman, will announce "an ambitious plan to overhaul the world monetary system." Nothing else was said. Since then, the writer has not seen any detailed article making public the plans of what this private commission called "The Bretton Woods Commission". The writer believes this study is critical to the reason for the seismic shifts occurring in the dollar and in the American economy.

    Because of Daniel Burstein's prediction that a "global currency agreement would be hammered out between 1995 and 1997," the writer has been following, if you will, the "countdown to a one world currency." Why else would the dollar drop so substantially against other currencies if it wasn't to create a global currency? The sole purpose of currency is to support the economic transactions of a government. Talking about a global currency agreement is basically talking about a world government.


    See also:

  6. Warren Buffett said it best I think.

    Interest rates are like gravity - as they go up, the present value of all future cash flows is reduced.