On December 16, 2015, the US Federal Reserve raised its key rate by 0.25%. This caused considerable resonance in the global economic community - after all, the rate was last changed in mid-2006. What is the need for such changes, and what can they lead to?

What is the base interest (key) rate?

This indicator represents the percentage at which banking organizations borrow funds from the country's Central Bank (in America, its functions are performed by the Federal Reserve). The interest rate at which banks issue loans to ordinary citizens cannot be lower than the established key rate - otherwise credit institutions will begin to operate at a loss. The 2008 financial crisis, which began in America and gradually spread throughout the world, forced the American authorities to take an unprecedented step and reduce the key rate to a record low level, ranging from 0 to 0.25%.

The temporary measure aimed at stimulating the economy and getting out of the current difficult financial situation dragged on, and the base interest rate was changed upward only in mid-December 2015.

How will a change in the Fed key rate affect the dollar exchange rate?

According to analysts, changes in interest rates will have a significant impact on the dollar exchange rate against the ruble (). Thus, the rating agency Moody’s prepared a report indicating the significant vulnerability of the Russian economy to changes in the domestic financial policy of the United States. The same opinion is shared by I. Didenko, who is a member of the International Union of Economists. According to him, raising the key rate will lead to a strengthening of the dollar and, as a result, a depreciation of the ruble.

Russian analysts, who are government officials, are much more optimistic. Deputy Chairman of the Central Bank of the Russian Federation S. Shvetsov announced the likely strengthening of the ruble and a depreciation of the dollar.

E. Nabiullina, who holds the post of head of the Central Bank, noted that the ratio of the ruble and the dollar is influenced by a combination of many factors, including oil prices, the foreign policy situation in the world, the economic interaction of Russia with partner countries, so a change in the key rate will not have a significant impact influence on the value of the dollar.

The head of the Ministry of Economic Development A. Ulyukaev said that the decision made by the Fed did not come as a surprise to anyone, and the expected increase in the key rate was taken into account when concluding contracts for oil supplies.

A change in the US Federal Reserve key rate by 0.25 points increased the value of the American currency on the world market. However, the rather insignificant size of this indicator allows us to conclude that there will be no radical jumps in the exchange rate - for example, since the decision was made to increase the rate, the dollar exchange rate relative to the ruble has increased by no more than a ruble. Oil prices have a much greater impact on the ruble exchange rate ().

Illustration copyright Gennady Safonov/TASS

The US Federal Open Market Committee on Wednesday raised its benchmark rate by 0.25 percentage points to a range of 1.25-1.5%. The American central bank is thus gradually tightening its monetary policy.

This is the latest rate hike under current Fed Chair Janet Yellen, followed by Jerome Powell early next year.

Experts expect that he will continue to tighten monetary policy: during the 2008-2009 crisis, the American central bank cut rates to almost zero, and also carried out large-scale asset purchases using newly printed money (these operations were called “quantitative easing”, or QE).

Just a few years ago, the Fed’s policy largely determined the state of global financial markets: flows of money from the American central bank flowed into developing countries, leading to the growth of their markets and strengthening currencies, and also contributed to rising oil prices after the 2008-2009 crisis. The first steps to tighten monetary policy in 2015 led to a fall in markets.

Now the influence of Fed policy has noticeably decreased. The BBC Russian service looked into how the Fed's rate hike will affect the ruble, the Russian market and oil prices in the long and short term.

Why won't markets fall after the Fed's decision?

"Markets have already priced in the Fed's rate hike," Renaissance Capital economist Charles Robertson told the BBC.

The same is stated in the report of the investment division of Sberbank (Sberbank CIB): “the increase in rates has already been fully appreciated by the markets and in itself will not lead to any market reaction.” According to the bank's analysts, the market's reaction will depend on the Fed's forecasts for 2018 - the regulator usually gives a signal about how rates will rise next year.

The market now assumes that the Fed will raise rates 2-3 times next year, Robertson explains. Emerging markets may react if the Fed gives a signal that next year they will raise rates by 3-4 times, the economist explains.

The change of the head of the Fed limits the significance of any assessments, Anton Tabakh, chief economist of the Expert RA agency, disagrees. After a series of new appointments, the dynamics of rate increases may change, he explains. At the beginning of next year, there will be a number of personnel changes at the Fed: not only the head of the Central Bank will change, but also a number of high-ranking officials of the American central bank.

Why does the Fed's policy have less and less impact on emerging markets and Russia?

Fed policy, according to Tabach, has less impact on emerging markets than before, and for other reasons: the investor base in emerging markets has become broader.

This year, the Fed has raised rates three times: at the beginning of the year, the rate was only 0.5-0.75%. Markets in developing countries are growing much faster than those in developed countries. Thus, the MSCI index for developing countries grew by almost 27.7% in 2017, while the British FTSE 100 index added only 7.7%, and the American S&P 500 - 17.5%.

Economists in various reports explain the growth of emerging markets by the acceleration of their economies, for example, the growth of the Russian economy accelerated, and in the middle of the year, many experts, although only slightly.

Tabakh also names another reason: Fed policy changes have become more predictable. They are announced in advance, and investors can “build them into the price,” the economist explains.

The Fed sets rates for the US economy, but the regulator is also concerned about how its actions will affect confidence in global markets, Sberbank CIB chief strategist Tom Levinson explained to the BBC. "US rates are rising, but the gradual rise in rates is supporting emerging markets," the economist explained. Levinson does not see that rising rates can somehow affect the ruble exchange rate.

"The Fed's policy remains soft. This softness means that a lot of money is distributed around the world, including Russia," Robertson adds. According to him, Fed rates, even after the increase, are still significantly below the combined level of economic growth and inflation.

Will rising rates in the US affect the ruble and oil?

In recent months, the ruble exchange rate has actually become untied from oil prices, experts and officials of the Russian Ministry of Economic Development say. One of the reasons for this is carry trade operations - when investors make money on the difference in interest rates in different countries. They borrow currency from a country with low interest rates, like the United States, and buy currency from a country with high interest rates, such as Russia. And then they invest the money in bonds, which brings additional income.

“Carry trade will inevitably decline on both sides - from rising rates in the United States and from their reduction in Russia,” explains Anton Tabakh.

“Most likely, we will not see a strengthening of the ruble next year; most likely, there will be a weakening,” he believes.

Both Tabakh and Levinson noted that the oil market is almost now independent of the Fed's policy. “Oil prices are now determined by supply and demand factors in the energy market,” explains Levinson from Sberbank. This essentially means that the Fed's policies will not affect them.

Since the end of 2015, the US Federal Reserve has begun normalizing monetary policy. The essence of this process is to bring the level of the effective federal funds rate to a sustainable level in the long term (currently estimated at about 4%), as well as to remove from its balance sheet the excess assets that the regulator acquired as a result of the quantitative easing program.

In December 2015, the rate was increased for the first time in 11 years by 0.25 percentage points. from near zero level. The next time the interest rate increased occurred only a year later - in December 2016, with a shift to the level of 0.5-0.75%. This year, the process of normalizing rates has accelerated, and two increases have already occurred - both of 25 basis points, and following the results of the December meeting, which will end on December 13, the interest rate is highly likely to be increased for the third time.

Why does the Fed raise rates?

Fed officials continue to argue that the rate hike is linked to expectations that inflation will rebound in the United States as the economy grows. Now the regulator is pursuing a policy to protect against a possible surge in inflation in the coming months due to the introduction of tax reform, which involves a significant reduction in the tax burden on business.

Tax reform in the United States is a key driver of high “risk appetite” in global stock markets: its implementation will accelerate US GDP growth next year to 2.0%-2.4% and accelerate inflation dynamics. In addition, the impact of Donald Trump’s presidential program on the economy in 2018, if it extends over 2-3 years, is estimated at 0.6%-0.8% of GDP, since part of the stimulus will most likely be used to repay debts and leveling out the slowdown in current growth rates. Against this background, the Federal Reserve is in a hurry to raise interest rates in order to create a basis for easing business conditions in the event of the loss of growth momentum and the US economy moving towards recession.

In February 2018, the post of head of the Fed will pass from Janet Yellen to Jerome Powell, but this will not change the direction of monetary policy in the United States. Despite the fact that the new head of the Federal Reserve is characterized by softer views, the market expects at least two more rate hikes in 2018 to 2%.

Thus, by the end of next year, the economy and financial markets may fall into an unpleasant trap: interest rates are rising, the Fed is determined to prevent inflation from rising above its 2% target within a year, while the US economy is not seeing much effect from tax reform and, according to forecasts, the rate of GDP growth begins to gradually slow down to 2% - this level can be reached in the fourth quarter of 2018.

What should an investor do?

What are the dangers of raising the federal funds rate to 2%? The fact is that, provided that long-term inflation expectations remain at about 2%, an increase in interest rates has the greatest impact primarily on the short part of the curve, pushing LIBOR rates and Treasury yields with a maturity of up to two years higher. . As a result, by 2019, “short” rates may be higher than “long” ones, which will negatively affect the dynamics of the financial sector. This inversion of the curve is often called a harbinger of recession.

This situation may be exacerbated by a liquidity shortage in the banking system due to the fact that the Federal Reserve, in parallel with raising rates, has begun to reduce its balance sheet. From October, the volume of assets under management of the regulator will be reduced by $10 billion per month, while sales are expected to increase quarterly with the goal of reaching $50 billion per month.

At the same time, an increase in the US government budget deficit in connection with tax reform may have a positive impact on the state of the stock market, fueled by both a decrease in multipliers and the likely announcement of plans by the largest corporations to conduct a buyback and pay increased dividends.

However, the expansion of the budget deficit creates medium-term threats to the Treasury bond market due to the high dependence of the US budget on market attractions of government debt and capital inflows. So in the future, the US Treasury may face an increase in borrowing rates and an increase in the cost of servicing debt obligations.

Given the reluctance of the European Central Bank to rush to raise the key rate, as well as taking into account expectations for the US economy, the euro-dollar pair may fall to the range of 1.14-1.16 per dollar by the end of the year. However, by the middle of next year, the euro may well strengthen to 1.20-1.25 per dollar - economic processes are unlikely to allow the ECB to delay normalizing rates, and fiscal stimulus in the United States will be extended over time, which will significantly smooth out its impact on the American economy , which is in a mature growth phase.

In general, the beginning of next year looks quite rosy for the stock and bond markets of both developed and developing countries. Risk appetite will be maintained at a high level, which will push stock indices to new highs, and inflows into high-yield assets can be converted into strengthening currencies of developing countries. The Federal Reserve's further monetary policy, which carries risks of curve inversion, may rather become a good reason for taking profits on risky assets in the second half of next year.

On Wednesday, July 27, the US Federal Reserve System (FRS) will announce a decision on the base rate. The head of the regulator, Janet Yellen, and her colleagues will determine the further monetary policy of the United States. Its tightening - that is, raising the rate - will lead to a collapse in oil prices and a fall in the ruble exchange rate. Lenta.ru answered five main questions about the Fed’s actions.

What is the Fed base rate?

The base rate, or the Federal Reserve Funds Rate, is the percentage at which banks provide unsecured overnight loans to each other (that is, for one day) from excess reserves. Formally, the rate is set on the open market. But in fact, the Federal Reserve can influence its level by setting a target. Now it is 0.25-0.50 percent.

At the same time, there is a discount rate at which the Fed allocates money to banks per day directly from its own funds. It is usually higher than the base rate (currently 1 percent). The discount rate is mentioned much less often simply because it is not as “popular”: financial institutions view the Fed as a lender of last resort and turn to it only in cases of emergency.

In addition to rates, the Fed has several other tools at its disposal. So-called quantitative easing, for example, involves massive purchases of US government bonds to pump money into the financial system. Additionally, at the height of the 2008-2009 crisis, the Federal Reserve purchased corporate bonds to provide real sector companies with access to funds when banks had virtually stopped lending to them.

How does the Fed rate affect the global economy?

For banks in the system, the ability to quickly borrow money for a short period of time is of great importance. If the federal funds rate is low, then credit institutions manage their available funds more calmly, more actively distributing loans to other banks and the real sector. This, on the one hand, increases economic activity, on the other, provokes an acceleration of inflation.

Therefore, the Fed uses this tool depending on economic conditions. In case of recession, stagnation or weak economic growth, the rate is lowered to stimulate lending and the economy. Under normal dynamics, the rate is increased to avoid accelerating price increases and overheating the economy.

Since the United States is one of the largest economies in the world with a colossal financial market, and the dollar is the main reserve currency, the Fed rate affects everyone. Raising rates leads to a massive exodus of investors into American assets, which means a strengthening of the dollar and lower commodity prices.

Is the current rate low or high?

The period of low, near-zero rates has lasted for almost eight years. A generation will soon grow up that has not seen any other financial policy of the American regulator. In fact, by the standards of any past era, this situation is unique. Before 2008, the rate had dropped to 1 percent only once—in the early 2000s, after a massive stock market crash caused by the collapse of Internet companies—and then only briefly.

Now there are reasons for a soft monetary policy. The 2008 financial crisis was one of the worst in history, shaking the global economy to its core. Many banks never fully recovered. A return of rates to the normal levels of the mid-1990s or 2000s could trigger another disaster.

Even the current ultra-low interest rates, however, have not helped the United States reach the levels of ten years ago. On the other hand, the semi-depressive state of the economy curbs inflation, which makes it possible to maintain near-zero rates for such a long time.

Previously, it was believed that such a financial policy could inflate financial bubbles and thereby create conditions for a new collapse. This view is now being questioned. The Fed today is a pioneer in learning economics in practice. There is no historical precedent for a zero-rate policy.

What is the probability of the rate changing this time?

Very small. The chance of a rate hike of 0.25 percentage point or higher does not exceed 2.4 percent, futures indicate. And there are enough reasons for this. First of all, the state of the American economy continues to cause concern among financial authorities. According to Kirill Kononovich, an analyst at the investment company Exante, the May report on employment in the United States and the number of jobs created was a failure.

Ilya Frolov, senior manager for research and analysis of industries and capital markets at Promsvyazbank, believes that the rate will not be increased until the end of the year.

“Despite the slight recovery in the US economy in the summer months, we see a number of obstacles that will not allow the Fed to raise the rate - the heterogeneous state of the labor market, the absence of pronounced inflation risks, weakness in industry,” he said in an interview with Lenta.ru .

In addition, Janet Yellen is now looking back at the state of affairs in the world. And it is even further from ideal than in the USA itself. “The possible contribution of Brexit to the slowdown in the global economy and instability in markets (primarily developing countries) is still unclear. Raising rates in the US will lead to an outflow of funds from Europe and the UK,” explains Kononovich.

To this it is worth adding the difficult situation with bad debts in Italy - this is a new threat to the eurozone and the European Union. All this forces the Fed to be more careful with any changes in monetary policy.

What will happen to oil and the ruble?

If, following the results of this or the next meeting in September, the Fed nevertheless raises the rate, then the dollar will strengthen first. With all the ensuing consequences.

“What would investors prefer: receiving negative returns on low-risk bonds (like German ones) in Europe or investing in American securities with the same level of risk and higher returns (and potentially benefiting from the rise in price of the dollar against the euro)? Hence the increased demand for American currency. Under these conditions, the cost of commodity assets will decline - demand for many of them, including oil, remains limited, and supply remains excessive,” notes Kirill Kononovich from Exante.

At the same time, Ilya Frolov from Promsvyazbank believes that we will not see a direct impact on oil prices. In the hydrocarbon market, the main role is now played by fundamental factors - increased production and increased drilling activity in the United States, as well as overstocking of petroleum products in key markets.

In general, Kononovich points to the strong influence of the Fed rate on the Russian economy. “Essentially, the Fed rate is a measure of the cost of lending around the world. Even under sanctions, external borrowings by Russia and Russian corporations are tied to the global level of rates,” the analyst comments. If the cost of lending in the United States increases, it will also increase for Russia.

And yet experts are confident that the rate will not be increased. Therefore, it is worth paying special attention to the Fed’s comments issued following the July 27 meeting. Their publication will also affect the market.

“If the comments turn out to be harsh and indicate that the rate is likely to rise before the end of the year, then we may see a wave of sales in high-risk assets - these include oil, as well as a strengthening of the dollar in the international foreign exchange market. This will lead to a deterioration in investor attitudes towards Russian shares and the ruble,” concluded Bogdan Zvarich, an analyst at the Finam group of companies.

The issue of raising the rate this December has already been virtually resolved - investor confidence in this Fed decision on Monday, according to CME Group data, reached 100% . However, the size of the rate increase has never before caused so much controversy, both among Russian and Western economists. Let me remind you that the new head of the Fed is Jerome Powell, who is focused on developing the economy, and not on ensuring financial stability (like Jeanette Yellen), so on the eve of his taking office, a sharp change in the paradigm of the Fed’s priorities is possible. Changes in the exchange rate may begin as early as December. The consensus forecast of Western brokerage houses is about 25 percentage points from the current rate of 1.25%, while Russian analysts tend to assume more decisive actions - up to an increase of 0.5%, explaining this by the fact that the rate lags behind the index inflation expectations, which currently stand at 2.8%, could lead to uncontrolled price increases.

If we take into account that the Fed's long-term key rate target is 2.75%, Russian analysts are, of course, closer to the truth. However, now a sharp increase in the key rate could return increased volatility to the US stock market, which is experiencing historical highs, which, in turn, could result in negative consequences for the medium-term growth of the country’s economy. For example, HSBC experts are inclined to assume that such steps may provoke a change from a conservative approach on the part of investors to a more risky one, as was the case in the 2000s, which means that the economy may achieve target indicators much faster than the Fed assumes, but the price of this growth may be subsequent decline In addition, based on the rhetoric of the Trump administration, the winding down of the quantitative easing policy, as a result of which the United States has the highest external public debt in history and the lowest lending rates in history, is not desirable in light of the tradedeals initiative proposed by the American president (concluding new trade agreements with international partners, some kind of insurance against a decline in the country’s economic growth). A weak dollar is important for the implementation of new trade agreements.

Currently, in anticipation of the Fed's decision, the dollar is growing against all world currencies (to ruble And Euro it strengthens relatively moderately), oil contracts are under pressure and are becoming cheaper, just as gold. At first glance, all signs point to an imminent significant decline in the ruble against the dollar - at least, Russian investors and funds investing in Russian assets have already begun to prepare for this. Yields on US bonds fall (to less than 2.8%), shares of technology and energy companies rise sharply S&P 500 to a record 2659.99. Let me remind you that this index updated its historical maximum for the 59th time this year.

However, the decline in oil prices is extremely episodic: on December 6, having decreased by 2.6% and 2.3% on the Chicago and New York exchanges, respectively (following January oil futures, which traded around $62 per barrel), on Friday, oil returned to growth again, on the one hand, thanks to the increased attention of international investors to energy assets (including Russian ones), and on the other, thanks to the report Baker Hughes, showing a noticeable decline in crude oil reserves in US oil storage facilities. Chances are that after the announcement Fed decisions, oil will drop significantly, slightly - at the moment this is in no one's interests. Gold continues the bearish trend, having already dropped to $1,240, but there are no sharp changes in its exchange rate yet - owners of gold contracts apparently do not expect a significant increase in the rate and are in no hurry to close positions.

All this indicates that most likely the current fever that we are seeing in the US market and in Europe is more of a storm in a teacup than a preparation for a change in the Fed's monetary policy. This means that the ruble has every chance of remaining relatively stable against the dollar. As for the euro, much depends on ECB meetings, which is scheduled immediately after the Fed board meeting. Most likely, the European Central Bank will leave everything unchanged.