Article Image 28995

The Money Cloud explains: the Federal Reserve rate rise

The financial press is packed with speculation over the US Federal Reserve – will it increase interest rates next week? If it does, what will be the effects? Amongst all the media buzz, we look at what a rate rise actually is and why this one's attracting so much attention.

What’s going on?

The Federal Reserve (aka the Fed) is America's central bank, and it’s preparing for a policy meeting on 16 and 17 September.

A 'rate rise' refers to an increase in the 'federal funds rate' – a benchmark interest rate set by the Fed, which guides how much banks charge each other for short-term loans and in setting their own product interest rates. 

Why does it matter?

Interest rates have been at historic lows of almost 0% since December 2008. They were lowered to encourage growth by helping businesses and consumers to borrow money for less, and spend it to stimulate the economy.

The increase in jobs and decrease in unemployment we’ve seen in the US this summer suggest that it’s started to work, and so the Fed can increase rates, and costs for borrowers. This boosts earnings for banks and rewards savers with higher interest accounts.

So what’s the problem?

The International Monetary Fund and the World Bank argue that a rate increase would hit emerging markets hardest. Much of their debt's denominated in dollars and owed to the US, so the costs of their repayments would increase. Considering the recent market dips caused by slowing growth in China, a hit like this would be enough to spark panic in the markets and possibly even recession.

What about international money transfer

The increased borrowing costs for emerging markets could lead to deflation as central banks tighten economic policy. Turkey, Brazil and Russia in particular have taken out large, dollar-denominated loans in recent years, so their currencies are likely to lose value.

The IMF's José Viñals also suggested that a rate rise would combine with the impact of falling commodity prices, caused by the Chinese slowdown, to hit Argentina, Brazil, Nigeria and South Africa especially hard.

Meanwhile, the dollar's likely to appreciate due to the increased loan repayments and an influx of investors looking for protection against market volatility.

If you're transferring money internationally, it's important to consider the situation. If rates are to rise, you'll get more value buying dollars now than later. But if you're buying other currencies with dollars, you'll get a higher return by waiting to make your purchase until after rates have risen.

Check on exchange rates and make sure you're getting the best deal with our free broker comparison tool.

Comparison tool

R.H

I am extremely impressed with the Investec currency exchange team service levels, they are fast and efficient. Excellent trading rates and straight talking, what more do you need.

Chloe Rogers

Your site is top, thank you. I was going to use my bank and but came across you on Forbes site, I am glad I did. I went on and used Torfx very good service got the rate right, saved me money compared to many others you list, they even helped me get an aussie bank account. Once again thank you for help!
International payments - overseas money transfers

INTERNATIONAL MONEY TRANSFERS FOR BUSINESSES

As a business, making global payments involves many risks, including exchange rate risk. If you are making regular transfers the cumulative costs due volatile exchange rates can be excessive. We can empower you to make International Payments cheaper and easier for your business.

regular overseas payments

MAKING REGULAR OVERSEAS PAYMENTS FOR YOUR BUSINESS

If your business makes regular overseas payments, the costs associated with fees and exchange rates can mount up. We show you the best methods for saving money and taking advantage of superior exchange rates. Demonstrate the considerable savings your business can make over time.

Market Insights

Sign up for our newsletter.

Thank You for subscribing to our Newsletter

You have successfully signed up to our Newsletter