What happens if Fed cuts interest rate by 50bps?

The Fed meet is to be held on 31st July 2019. Most of the experts expecting for 25bps rate cut but some more analysts expecting a rate cut for 50bps. Now what will happen if Fed cuts the interest rate by 50bps? Here we see:

Inflation:

The Fed members are very much worried about the inflation rate which is much below the expected target of 2%.  So no need of rate cut and if there is a higher rate cut then the inflation will grow higher which the Fed doesn’t want to happen.

What are the key factors influencing Forex Markets?

 

 

Bond Markets:

The long term bond yields are not satisfactory for the investors as the short term bond yields gives better returns than long term yields. The investors are not in a mood to pay higher premium for long term yields. This also makes the investors that a rate cut will occur.

How bond market related to economy?

Employment rate:

The employment rate had a growth and is much more than expected by the analysts. It is not a worry even if the Fed is announcing 50bps point cut.

How Non-Farm payroll plays an important role for the economy?

Economy:

The economy is strong for U.S when comparing to other countries. If the Fed has a bigger rate cut a threat for financial market bubble may be visible. Moreover the debt will increase and move for a beginning of recession phase.

Why monetary policy important for a country?

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What is Monetary Policy? What are its importance and impacts?

What is Monetary Policy?

Monetary policy is a set of economic policy that manages the size and growth rate of the money supply in an economy. It is a powerful tool to regulate macroeconomic variables such as inflation and unemployment.

Monetary policies are implemented through different tools, including the adjustment of the interest
rates, purchase or sale of government securities, and changing the amount of cash circulating in the economy. The central bank or a similar regulatory organization is responsible for formulating monetary policies.

Importance of Monetary Policy:

To ensure economic stability at full-employment or potential level of output;
To achieve price stability by controlling inflation and deflation; and
To promote and encourage economic growth in the economy.

Monetary policy is concerned with changing the supply of money stock and rate of interest for the purpose of stabilising the economy at full-employment or potential output level by influencing the level of aggregate demand.

More specifically, at times of recession monetary policy involves the adoption of some monetary tools which tend the increase the money supply and lower interest rates so as to stimulate aggregate demand in the economy, on the other hand, at times of inflation, monetary policy seeks to contract the aggregate spending by tightening the money supply or raising the rate of interest. Monetary policy has also to promote and encourage economic growth both in the industrial and agricultural sectors of the economy.

Impacts of Monetary Policy:

Monetary policy is a powerful tool that the government and concerned monetary authorities use to influence the economy based on a reaction to certain issues and predictions of where the economy is moving. The monetary authorities need to make accurate predictions based on solid information to properly adjust the money flow and rates of interest. There is an inverse relationship in money flow and interest rates. Increasing money flow and decreasing interest rates can encourage spending and, as a result, stimulates the economy. More spending means more jobs and curbing unemployment.

Monetary policies have an impact on an individual’s life too. If a government thinks the economy is overheating and growing very fast, there are chances of inflation so, the government may decrease spending.

Similarly, taxes play a vital role in monetary policy. Decreasing taxes can stimulate the economy as people will have more money in pockets to either invest or save. The investments will increase production and more people will be hired reducing the level of unemployment.

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Trade War and its effects

What is Trade War?

It’s a feud between two or more nations regarding trade tariffs on each other. The feud usually arises when the nations involved are trying to improve imports or exports for their own country. Trade wars have the potential of increasing the costs of certain imports if the nations involved refuse to make an agreement.

What are the effects of the Trade War?

On a positive note, it will raise demand for local goods, the employment rate in the country will grow. Narrows trade deficits and penalize the nation for unethical trading.

On a negative side, a slowdown in the country’s economic growth, Price increase and shortage of products, pay more for raw materials and earn less profit. Finally, there will be a rise in inflation.

Previous Trade Wars:

Anglo-Dutch Wars(1652–1784)
Opium Wars(1839–1860)
Banana Wars(1898–1934)
Smoot–Hawley Tariff Act(1930), a United States Act implementing protectionist trade policies
Anglo-Irish Trade War(1932–1938)
Trade war over genetically modified food(2010–2011)
Trump tariffs(2018)
China–United States trade war (2018–present)

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