[eli5] Why is US federal interest rate highly important in the financial world?
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It’s the interest your bank pays to borrow money from the government. If you want to borrow money, you’ll need to pay more than the federal rate or the bank loses money. It decides part of the interest for every loan given in the US.
It doesn’t matter in other places though. Europe’s finance is dependent on the ECB.
It’s the interest your bank pays to borrow money from the government. If you want to borrow money, you’ll need to pay more than the federal rate or the bank loses money. It decides part of the interest for every loan given in the US.
It doesn’t matter in other places though. Europe’s finance is dependent on the ECB.
It’s the interest your bank pays to borrow money from the government. If you want to borrow money, you’ll need to pay more than the federal rate or the bank loses money. It decides part of the interest for every loan given in the US.
It doesn’t matter in other places though. Europe’s finance is dependent on the ECB.
There are only a few currencies that are used a lot in global markets and held widely by most banks. These are the USD, EU, JPY followed by the GBP and RMB.
Banks have to benchmark their costs (interest paid to their depositors) against the interest rates offered by the Central banks of these major currencies. Investors and lenders also benchmark their risk and return against these interest rates. For example: If you could lend someone $100 and get 5% or lend to the US govt for 5%, it is almost certain that the US govt is less risky and would be preferred.
The USD is the major currency for international trade and loans. When the Fed increases their interest rates, it has a very big influence in the cost of borrowing and returns required from investors. This has the effect of “pulling” investment into USD usually strengthening the USD.
There are only a few currencies that are used a lot in global markets and held widely by most banks. These are the USD, EU, JPY followed by the GBP and RMB.
Banks have to benchmark their costs (interest paid to their depositors) against the interest rates offered by the Central banks of these major currencies. Investors and lenders also benchmark their risk and return against these interest rates. For example: If you could lend someone $100 and get 5% or lend to the US govt for 5%, it is almost certain that the US govt is less risky and would be preferred.
The USD is the major currency for international trade and loans. When the Fed increases their interest rates, it has a very big influence in the cost of borrowing and returns required from investors. This has the effect of “pulling” investment into USD usually strengthening the USD.
There are only a few currencies that are used a lot in global markets and held widely by most banks. These are the USD, EU, JPY followed by the GBP and RMB.
Banks have to benchmark their costs (interest paid to their depositors) against the interest rates offered by the Central banks of these major currencies. Investors and lenders also benchmark their risk and return against these interest rates. For example: If you could lend someone $100 and get 5% or lend to the US govt for 5%, it is almost certain that the US govt is less risky and would be preferred.
The USD is the major currency for international trade and loans. When the Fed increases their interest rates, it has a very big influence in the cost of borrowing and returns required from investors. This has the effect of “pulling” investment into USD usually strengthening the USD.
A lot of smaller countries debt is denominated in dollars. If the US interest rate goes up it makes the Dollar more valuable and scarce created a Dollar shortage. This makes repayments and re-financing of debt more expensive for smaller countries as their own currency usually is losing value compared to the Dollar. Argentina is a current example of this. Most US companies and corporations carry huge levels of debt and mange this through loans and corporate bonds. This debt becomes difficult to manage when interest rates rise i.e newly issued corporate bonds have to compete with the yield on government bonds. Another example is approximately $1.5 trillion of US commercial real estate debt needs to be refinanced in the next two years where the initial loans would be almost zero they may need to be refinanced at 6%+. A high US interest rate has lots of knock on affects globally.
A lot of smaller countries debt is denominated in dollars. If the US interest rate goes up it makes the Dollar more valuable and scarce created a Dollar shortage. This makes repayments and re-financing of debt more expensive for smaller countries as their own currency usually is losing value compared to the Dollar. Argentina is a current example of this. Most US companies and corporations carry huge levels of debt and mange this through loans and corporate bonds. This debt becomes difficult to manage when interest rates rise i.e newly issued corporate bonds have to compete with the yield on government bonds. Another example is approximately $1.5 trillion of US commercial real estate debt needs to be refinanced in the next two years where the initial loans would be almost zero they may need to be refinanced at 6%+. A high US interest rate has lots of knock on affects globally.
A lot of smaller countries debt is denominated in dollars. If the US interest rate goes up it makes the Dollar more valuable and scarce created a Dollar shortage. This makes repayments and re-financing of debt more expensive for smaller countries as their own currency usually is losing value compared to the Dollar. Argentina is a current example of this. Most US companies and corporations carry huge levels of debt and mange this through loans and corporate bonds. This debt becomes difficult to manage when interest rates rise i.e newly issued corporate bonds have to compete with the yield on government bonds. Another example is approximately $1.5 trillion of US commercial real estate debt needs to be refinanced in the next two years where the initial loans would be almost zero they may need to be refinanced at 6%+. A high US interest rate has lots of knock on affects globally.
The US federal interest rate is highly important in the financial world because it serves as a benchmark for many other interest rates in the economy. When the Federal Reserve, which is the central bank of the United States, sets its target interest rate, it influences the interest rates that banks charge each other for loans, as well as the interest rates that consumers and businesses pay for various types of loans, such as mortgages, car loans, and credit cards. Additionally, changes in the federal interest rate can have a ripple effect on other aspects of the economy, such as inflation and employment levels. As a result, the federal interest rate is closely watched by investors, economists, and policymakers around the world, as it can signal important shifts in the global financial landscape.
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