Impacts of Fed Rates

Why in news?

USA’s Federal Open Market Committee announced there will be no increase in the fed rates.

What is US fed rates about?

• The Federal Open Market Committee (FOMC) is the monetary policymaking body of the Federal Reserve System in the U.S.
• The fed funds rate is what banks charge each other for overnight loans to meet these reserve balances.
• The amount loaned and borrowed is known as the federal funds.
• If the FOMC wants the rate lower, the Fed purchases securities from its member banks.
•  It deposits credit onto the banks' balance sheets, giving them more reserves than they need.
• It forces the banks to lower the fed funds rate so they can lend out the extra funds to each other. That's how the Fed lowers interest rates.
• When the Fed wants rates higher, it does the opposite.
• It sells its securities to banks and consequently removes funds from their balance sheet.
• This gives banks fewer reserves which allow them to raise rates. Since 2015, the Fed has been raising interest rates, it does this to control inflation.

What are recent decisions on fed rates?

• Earlier FOMC voted unanimously to increase the short-term interest rate by a quarter of a percentage point, taking it from 2.25% to 2.5%.
• Which was the fourth increase in 12 months, a sequence that had been projected a year ago.
• The FOMC members also indicated that there would be two more quarter-point increases in 2019.
• The announcement soon met with widespread disapproval and recently in was decided that there will no more increase in rates.
• With the Fed no longer raising rates this year, a major overhang has been lifted for emerging markets’ (EM’s) dollar issues and stocks.

What are emerging markets?

• Emerging markets, also known as emerging economies or developing countries, are nations that are investing in more productive capacity.
• They are moving away from their traditional economies that have relied on agriculture and the export of raw materials.
• Leaders of developing countries want to create a better quality of life for their people.
• They are rapidly industrializing and adopting a free market or mixed economy.
• Emerging markets are important because they drive growth in the global economy.

What is the performance of emerging markets?

• After a bruising rout, emerging-market junk bonds are scaling a golden mountain, Credit seems like the right place to be these days.
• Since a low in late November, Asia’s high-yield corporate bonds have already risen more than 4%, while emerging-market stocks have been trading sideways.
• Since November, China’s real-estate developers have been racing to raise dollar bonds, at the expense of offering average interest payments of about 10%.
• Meanwhile, because of their high-yield nature, these issuers tend to sell bonds with two-year maturities.

What are china’s expectation in this regard?

• China’s high-yield developers have raised close to $15 billion offshore since November, but they still can’t finance onshore.
• More likely, banks and fund managers in China are too scared to dip in.
• China’s property developers have a lot of dollar obligations to pay off, they have even more in yuan.
• The sector needs to refinance 6 trillion yuan ($880 billion) worth of liabilities.
• Because of tight financing in 2018, private enterprises will have a particularly hard time servicing this debt.
• This real-estate developer operates in tier-two cities at best—in 2018, its average selling price was only 11,292 yuan per square meter—and can generate a return on assets of just 5.7%.

Source: Financial Express