Relationship between US and Lebanese Interest rates.

US Interest Rates

The Effects of Changing Interest Rates

The Fed has the power to control interest rates through government-backed securi-ties. These investment instruments can be bought or sold, depending on what the Fed decides. If the central bank wants to lower interest rates, it buys a lot of securi-ties, infusing the banking system with cash (kind of like in the old days when the Fed actually controlled the amount of money on the market). With more money available, interest rates decrease. If the Fed wants to raise interest rates, it sells se-curities.

This adjusts the federal funds rate -- what banks charge one another for short-term loans. The Fed can also adjust the discount rate, which is the interest rate it charges banks for loans obtained directly from the Federal

But why would the Fed want to change interest rates at all, let alone raise them? Because changing the interest rates can stimulate economic growth and fight infla-tion. It's trickier than it sounds.

There's a lag between the Fed's actions and recognisable results. And time is of the essence when quelling inflation or stimulating the economy, because opposite forces are at work. While taking action may have negative consequences, doing nothing can have a detrimental effect, too.

The average person is interested in real interest rates. "Real interest" is the differ-ence between nominal interest (what's set by the Fed) and the rate inflation. Real interest rates are the ones you get from your bank when you purchase a car or take out a credit card. If it looks like inflation will go up in the future, real interest will be set at a higher rate.

But if the real interest rate is low, the costs of living, doing business and investing are also low. This stimulates the economy because home and car loans are more affordable. If people can borrow more, they'll spend more. Low real interest rates also generally weaken the dollar, which (in the short term) can be a good thing. When the dollar is weak, foreign goods are more expensive, so Americans tend to buy American-made goods. This stimulates the economy even further because high demand for American goods increases employment and wages.

So why doesn't the Fed simply keep nominal rates low? The problem is that this also leads to inflation. If a society's demands for a certain good exceed the supply, then the product's price will go up. When inflation increases, economic growth be-gins to slow. The price of the good increases, and so demand for it wanes. Less de-mand leads to less production, and eventually, unemployment ensues.

To offset inflation, the Fed must raise interest rates. Since low interest rates gener-ally indicate a weak dollar, the increase in interest rates can strengthen the dollar. High interest rates can attract foreign investors looking for high-yield returns on their investments. This causes more demand for the dollar, which increases its value. Eventually, the increased value of the dollar will ultimately slow foreign in-vestment, since it takes more foreign currency to purchase a dollar.

But the flow of investment can reverse. A stronger dollar has more buying power worldwide, which allows Americans to purchase foreign goods and invest in foreign companies. This puts added pressure on American companies to compete with cheaper foreign products. If the companies can't compete, unemployment rates rise and domestic economic growth decreases. Abroad, U.S. exporters' growth may slow, too, since a strong dollar increases prices for American-made goods abroaD.

Source: http://money.howstuffworks.com/fed-change-interest-rate1.htm

Thoughts The Issue

“It is good news that the Federal Reserve did not raise interest rates today. At a time when real unemployment is over 10%, we need to do everything possible to create millions of good-paying jobs and raise the wages of the American people. It is now time for the Fed to act with the same sense of urgency to rebuild the disap-pearing middle class as it did to bail out Wall Street banks seven years ago.”

- Quote for Vermont Senator and 2016 presidential candidate Bernie Sanders

“We are pleased that the Federal Reserve has kept interest rates unchanged. We know the economic recovery still has not reached working families and even a small increase can have devastating effects on our economic stability.

The Federal Reserve is wise to not raise interest rates while inflation is running low and wages are flat. Real wages need to rise with productivity. We hope the Fed will now dedicate its time to producing economic policies that work for all and raise wages to a level that can sustain a family. An out of balance economy that exacer-bates the incredible income inequality we see in this country must be fixed to strengthen our families and communities.”

- Quote for AFL-CIO President Richard Trumka echoed similar sentiments in his statement. AFL-CIO is the largest federation of unions in the US.

Will they eventually be raised?

Rates are still expected to be raised this year, with 13 of the 17-member committee predicting that the Federal Open Markets Committee (FOMC) will raise rates by at least 0.25 percentage points. However, four policymakers believe that rates should not be raised until at least 2016, including one who pushed out until 2017. In June only two members felt the rate hike should be left unchanged until 2016.