Question

Premature to rule out an interest rate increase this year In the current state of the economy, it would be worse for the Fed to raise rates too soon than moving slightly too late and adjusting by raising rates more quickly Source: Wall Street Journal, August 1, 2016

What are some of the problems that could arise if the Fed raises interest rates too soon or too late?

Answer 1

Ans: The effect of Fed interest hike can be given as below:-

a). With too soon increase in Fed rates the banks would also increase prime rates of lending to consumers. If it is done too late then liquidity in market would increase beacuse lending rates would be lower.

b). With too soon increase in Fed rates, then banks would increase savings rate which would promote savings to American market and liquidity would decrease. With too late increse in Fed rates, the banks would not increse savings rate and liquidity would be there in the market.

c). With too soon increase in Fed rates, the international markets would also be affected because FIIs (Foreign institutional investors) would pull the money out and invest in American market.