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Last September 15, 2015, the US Federal Reserve decided to keep their interest
rates unchanged in a bow to worries about the global economy, financial market volatility
and sluggish inflation at the US. Fed Chair Janet Yellen said developments in a tightly
linked global economy had in effect forced the US central banks hand. This move by the
US Federal Reserve caused some Asia- Pacific central bankers speculate that rather than
containing global economic uncertainty, it rather added to that uncertainty. Bank Indonesia
Senior Deputy Governor Mirza Adityaswara said that it would have been better if the US
Federal Reserve increased its historically low rates to create stability in emerging markets
and enable them to continue developing and reforming their economies. These reactions
came despite broad recognition that a Fed increase of short-term interest will prompt
investors to pull money out from emerging market countries in Asia. Many investors still
believe that the US will increase rates this year which will intensify the strain on developing
nations that are already struggling with slowing growth, substantial debt and crumbling
Overnight rates refers generally to the cost charged to banks for borrowing money
from Federal Reserve Banks. In the USA, the central bank uses this rate to influence
monetary policy. This is important for investors to decide on which type of investment will
Interest rates and inflation are directly related to each other (Reilly & Brown, 2012).
These two are part of the six key economic variables which provides significant
information about the macroeconomy. Inflation is the measure of how fast the overall level
Therefore, if interest rates are lower, consumers tend to borrow money and have a surplus
of cash to spend on both necessary and luxury items whereas if interest rates are higher
consumers are deprived of borrowing resulting in lesser quantity of available cash to spend
and they expend on necessary things. Moreover, when investors anticipate an increase in
the rate of inflation, we would expect them to increase their required rates of return by
similar amount to derive constant real rates of return (Reilly & Brown, 2012). There are
two types of interest rates, we have the nominal and real interest rates. Nominal interest
rates is the rate in terms of money which does not take into account the effects of inflation.
While real interest rates is the rate in terms of goods and services which takes into
consideration the effects of inflation. To derive real interest rate, it will be the nominal rate
plus the premium for expected inflation. Investors are concerned in these two variables
because from these they can speculate on the economic conditions and decide whether it is
In light of the issue pertaining to the move of the US Federal Reserve to keep their
interest rates at bay to address the global economic uncertainty, it is true that it affects the
position of emerging economies of developing countries especially in the Asia Pacific. The
problem in consumer spending in the US affects the inflation rate which also directly
affects the economic condition of the country. They aim to encourage their citizens to
borrow money at a lower interest rate and increase their spending. Moreover, since the US
is composed by small businesses in majority, they are encouraged to invest more and
increase their economic activity. The increased spending and investing activity of local
individuals and businesses will contribute in a better flow of money and inflation will
increase at a normal rate which affects the economy as a whole. This fiscal policy of the
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US affects developing countries because many investors are encouraged to pull out and
park their money where they expect the stock market in a bull state. On the other hand, the
speculation that many investors will still pull out their money when the US Fed Reserve
increase their interest rates from the emerging markets is also true. The USA funds their
economic activities also through borrowings, therefore, creditors are more encouraged to
invest their money in the US where they expect a higher rates of return.
Investors aim to maximize their wealth and these information are important. To
address worldwide market uncertainty, one country should have a strong fiscal policy.
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References:
Mueller, J. (2006). How Interest Rates Affect The Stock Market. Retrieved from the
https://en.wikipedia.org/wiki/Overnight_rate.
Reilly, F.K., & Brown, K.C. (2012). Investment Analysis & Portfolio Management. South-
Schneider, H. & Saphir, A. (2015, September 19). Fed keeps US interest rates unchanged.
Six Key Economic Variables. (2001). Retrieved from the Standford website:
http://web.standford.edu/class/msande247s/econVariables.ppt.
Six Key Economic Variables. (2004). Retrieved from the Management- Class website:
www.management-class.com/courseware/strategic/tutorials/keysix.ppt.
WSJ. (2015, September 19). Fed move prolongs market uncertainty. Manila Bulletin, p.
B3.