One of the hot issues today is about the interest rates of the United States Federal Reserve. This is because it has a global impact.
Every country and various large companies have reserves of US dollars. In addition, they also hold bonds or debt securities denominated in US dollars.
Countries around the world will also react if the US Federal Reserve lowers or raises interest rates. One of them is to maintain the value of their currency.
For example, producer and manufacturing countries like China certainly do not want their currency to be too cheap, let alone too expensive. Even a slight change in the value of their currency can affect their export performance.
In addition to devaluation, another thing to note about this issue is inflation. The US Federal Reserve continues to make policies to take US dollars out of circulation because it wants to lower inflation in the country.
So what happened to Silicon Valley Bank?
What Federal Reserve Is ?
The Federal Reserve was created for noble purposes, including maintaining stability to prevent economic collapse, unemployment, and inflation.
It has been proven since the establishment of the Federal Reserve that the United States has continued to develop and become very advanced. All industries, from technology to the military, have been built correctly and have generated significant profits for shareholders.
The Federal Reserve can lower the unemployment rate by lowering the central bank's interest rates. This is because if the loan interest rate is cheap, companies will easily get access to capital to develop their business and then require more employees.
One classic perception of the central bank is that if interest rates rise, inflation will decrease. This is generally true, but the increase in interest rates can mean that companies incur more costs for capital, causing their break-even costs to rise.
Another advantage is the ability to print money. This can be good or bad depending on the strategy used. For example, the Federal Reserve can print money to lend at low-interest rates to companies that are on the verge of collapse to prevent systemic collapse.
Taming The Beast, Name Is Inflation
Inflation has been very volatile lately. Inflation in many countries is above 4% per year, far from the target of some countries which should be below 4% per year.
Many things affect inflation, such as the post-covid economic recovery. During covid, demand for goods decreased, causing deflation or a decrease in the price of various products.
After covid ended and mobility reopened, demand for goods increased, causing prices to tend to rise. Moreover, during covid, producers sold some of their production machines to cover losses due to decreased sales and profits.
In addition, this also happens because the central bank printed trillions of US dollars during covid as an incentive to maintain the purchasing power of the public. In reality, the incentive funds only lasted a few days and were not effective, instead causing the central bank to raise interest rates afterwards.
Because inflation is higher than the target, the central bank has been raising interest rates in recent months. Taming inflation is the goal.
Banking Crisis
Increasing interest rates is a double-edged sword. It can also lead to a heart attack and cause the economy to collapse.
Many companies and banks have bonds or debt securities in their portfolios. However, banks are the ones most affected by this.
Banks will collapse if they have a portfolio of low-yielding bonds when the central bank continues to raise interest rates. This is because if they need liquidity, they will experience losses.
These losses are due to low-yielding bonds that will have a low selling price when the central bank's interest rates are higher than the bonds they hold. This is exacerbated by customers withdrawing their money from the bank.
Therefore, The Fed must think carefully if they want to raise interest rates again. Not to mention taking action to save customer funds that are stuck in banks on the verge of collapse.
Should It Up or Down ?
If The Fed continues to raise interest rates, systemic failure resulting in economic collapse will be worse than inflation. On the other hand, if they lower interest rates, inflation cannot be tamed.
The Fed and the US government must find more creative ways to tame inflation. One of their recent achievements has been lowering the cost of insulin that patients have to pay.
However, systemic banking failures can be prevented with measures other than monetary policy. Building trust among customers to remain calm can prevent systemic failure.
The increase in interest rates itself has not had a significant impact on curbing inflation. The Composite I Bond is still at 6.89%, reflecting government data on inflation.
However, some critics argue that the government's assessment of inflation at 6.89% is somewhat inaccurate and that it is actually higher in reality. It seems that The Fed will give a little pause in raising interest rates.
