johnnymk

Mon Apr 19, 6:24 AM ET

LONDON (AFP) - The United States Federal Reserve (news - web sites) must prepare the global economy for an interest rate hike to "avoid financial market disruption both domestically and abroad", the IMF (news - web sites) is to warn this week according to the Financial Times.


The FT quoted the main chapter of an International Monetary Fund report it had obtained as adding that the IMF will urge the European Central Bank to consider cutting interest rates owing to sluggish growth in the 12-nation eurozone.


The IMF's World Economic Outlook, to be published Wednesday, will coincide with testimony by Fed chairman Alan Greenspan (news - web sites) on the US economy, the FT report noted Monday.


The fund reportedly suggests in cautious language that "the ground should be prepared for future monetary tightening" given the "bouyant short-term outlook and the need to avoid financial market disruption both domestically and abroad."


As for the eurozone, inflation remained "surprisingly sticky" in spite of weak economic growth, the newspaper quoted the IMF report as saying.


"Inflationary pressures are likely to be restrained by weak domestic demand and the appreciating currency," it nonetheless added.


"Further easing would be appropriate if as a result of these or other factors inflation looked likely to fall below the desirable level

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LegendKiller

Sometimes I wonder if keeping the IR down is what is keeping the economy a little sluggish. People keep saying "we will see a pick up", but we aren't seeing anything huge, and why should we? Small gains aren't bad, nor are ~flat job growth, we have to level out sometime.

What would increasing the IR do? Provide some people and institutions better funded instruments and even spur international interest in US funds, leading to a re-appreciation of the dollar, lowering of oil prices, and perhaps spurring it on even higher.

One also has to wonder if this is a wag the dog scenario. How much of the doldrums are caused by Wall Street taking an unfavorable outlook because IR's haven't been raised? Why think things are getting better (or will soon) if the all knowing-all seeing-oracle of the Fed doesn't?


LK

zippyjuan

Lower interest rates domestically are thought to increase borrowing by companies for investment which will lead to more jobs being created. Higher interest rates raise the cost of borrowing by companies and will depress the demand for capital used for new factories and equipment.

On the international front, if- as the Fed is said here is going to do- US rates are increased and foreign rates decreased (or not raised as much) then capital from other countries seeking better returns on invstments like bonds will move towards the US. They will demand US dollars to make those investments and the value of the dollar will rise relative to those other currencies. This will result in things priced in dollars- like our exports and oil (which is usually priced in dollars) becoming more expensive to persons in the other countries so they will demand less of our exports. Imported items to the US will be cheaper and put more pressure on domestic producers to lower costs (i.e. cut back on labor and investments) to compete.

Oil prices in this country will not be effected by this, but for other countries it would become more expensive.

At this time, although things have picked up a bit recently, the number of jobs created have not been enough to keep up with the growing number of people needing them -whether by losing a previous job or just entering the job marked due to leaving school or whatever- and those created have been lower paying than the ones lost.

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cheapchinese

i really don't understand the OP...
can anyone put it in Laymen's language...

from what i read...(tell me if i'm wrong)
is that the fed would probably raise IR, and doing so, will help raise US dollars.

LegendKiller

I agree with everything you have said (which I actually said in my own post), except for this last part. Oil prices are high for this country due to the depreciated dollar against other currencies. Due to oil being denominated in dollars, it has become MUCH cheaper for other countries to purchase oil. To counter this, oil producing nations have raised the price of oil in dollar terms to realign pre-depreciation profits. Thus, in dollar terms, oil is more expensive than it previously was. This effects all facets of the US economy, not just the back-ended consumer.


Pretty much what I said also.


LK

zippyjuan

Oil prices for us are higher now not because the dollar is weaker, but because the suppliers (OPEC) are restricting supplies. Oil is priced in dollars per barrel so our price is effected by supply/demand not the value of the dollar. Other countries must first convert their currency to dollars and then buy oil so they are not just subject to supply/demand issues, but currency exchange ones as well. Since all companies in the world use energy in one way or another, they are all effected by energy prices, including oil.

LegendKiller

And why is OPEC tightening oil supplies? Not because they suddenly feel like they need to ship less, or just need more revenue on the fly. They are doing it because the oil they have is becomming cheaper to the world.

If 90% of the world buys oil denominated in dollars and oil producing countries get dollars, that means that the dollars they are now getting are worth less than they were getting before, thus, less revenue on a home or even foreign currency (excluding dollar) level.

This is avoided by keeping the revenue currency in dollars. However, that doesn't make any sense since stuff in their own countries are denominated in home country, or vacations are denominated in Euro's. This means that everything they purchase is more expensive relative to the revenue they are getting. The only way to put this into balance is to cause an increase in price of the oil, thus, cutting supply. This shifts the supply curve to the right, causing the equalibrium price to be moved higher on the demand curve, which results in a higher price.

Many people blame the Israeli war and US support for the petrolium crisis in the 70s, but it was also caused by the huge inflationary tendancies of the US economy, which devalued the dollar. OPEC nations responded by jacking up oil prices, which caused more inflation...etc.

I am not just making this up here. This is solid economic fact and has been discussed by many economists over the past couple months. There was a good article on it in Businessweek last week.

LK

slaus

Dont you mean a shift in the supply curve to the left?

LegendKiller

Indeed, upon reading what I typed, it shopuld be shifting it to the left, lower quantity hits demand curve higher resulting in a new, higher, equilibrium price.

LK