US interest rates, which have been hovering near zero for about 6 years, are expected to rise as the US economy continues its slow but steady recovery. The World Bank is closely watching what the US Federal Reserve will do, and when, and is expecting when that day finally does arrive, developing economies might be in for some hard times.
The hike in interest rates could come as early as this Thursday, when the Fed winds up a policy meeting. In a report issued by the World Bank they warn that such a rise could have a modest impact on developing countries, but also adds that there is a chance that the fall-out could be worse.
The World Bank has several reasons for their concern. They believe that a rise in interest rates could interfere with capital flows into developing countries, which can lead to stifling of economic growth, which could then lead to financial instability.
Despite their warning, they also site several reasons to be optimistic. First of all, any increase in interest rates will happen gradually, allowing developing economies to cope more easily with any changes. They also point out that any changes in rates will happen within the context of a strong, growing US economy, which usually bodes well for the global economy in general.
The price of oil lurched upwards on Tuesday despite the fear that the Chinese economic recovery may not be everything investors wished for. Driving the upward direction of oil is the hope of investors that the US Federal Reserve will implement new strategies which will help give the US economy a bit of a jump start.
The January delivery price for Benchmark crude was $85.80 per barrel, representing a 23 cent rise during late afternoon Bangkok time electronic trading on the New York Mercantile Exchange. The same contract had fallen only the day before by 37 cents on the Nymex, closing at $85.56.
Brent crude, which is used more to establish the price of international types of oil, was also up. On the ICE futures exchange in London the price was $107.66, an increase of 33 cents from the previous day’s closing price.
The Federal Reserve began a two day policy meeting on Tuesday. The results of the meeting are widely believed to be the purchase of more long-term Treasury bonds in an effort to replace the program which expires with the coming new year.
In an attempt to help boost the sluggish economy’s growth President Obama announced a proposal which will allow all homeowners to refinance their mortgages at more attractive rates, even if what they owe on their mortgages is actually more than the worth of the house. This is a crucial issue in many states which are pivotal to Obama’s re-election.
Obama wanted to outline more specific details of the proposal he only outlined in his State of the Union Address concerning finding a way for homeowners to cash in on the nation’s record low mortgage rates. It is estimated that the average homeowner could save about $3,000 a year by re-financing.
Will Congress Agree?
The proposal, however, will need to pass through Congress, which is not necessarily in favor of such a plan if it would allow homeowners to refinance even if they own more to the bank than the actual value of the house, a situation which many homeowners find themselves in today due to the housing slump.
Not As Popular as Predicted
The plan is an enlargement of an already existing program, the Home Affordable Refinance Program. This plan lets borrowers who have government affiliated mortgages from Fannie Mae and Freddie Mac to refinance at more affordable rates. A disappointing one million people have use the plan, much fewer than the 4 to 5 million the Obama administration was predicting. The new plan also expands to include “underwater” borrowers; those that own more than the value of their homes.
Economists in the private sector believe that if the plan is expanded to all borrowers, then about 10 million homeowners would be qualified to refinance, giving the economy a jumpstart not to be underestimated. The Federal Reserve has been more conservative in their assessment of the plan’s impact, saying closer to 2.5 million additional Americans would be eligible to refinance under the terms of the expanded program.
CoreLogic, a real estate data firm, notes that about 11 million Americans are “underwater,” about 1 out of 4 homeowners who have a mortgage.
Vice President Joseph Biden announced this past Tuesday that because of lack of demand, the production of the $1 presidential coin would be terminated, and it will be taken out of circulation.
Low Demand for Coins
Demand for the coin is so bad, that right at this moment there are 1.4 billion surplus $1 presidential coins wasting away in Federal Reserve vaults. In addition the government states that taxpayers could save about $50 million annually in both storage and production costs by halting their creation.
The alternative plan which will go into effect will be for the US Mint to produce the coins only in limited quantities. Those coins “will be sold at a premium to collectors, so it will ensure that the coins will not be produced at a cost to taxpayers,” said Treasury spokesman Matt Anderson.
No Need for More Coins
Up until the announcement on Tuesday the US Mint was ready to produce another 1.6 billion additional $1 presidential coins until 2016. This is despite the fact that there already exist 1.4 billion of these coins in surplus, which is more than enough to meet the demand for the next ten years and beyond, said Anderson.
The presidential coins came about through a piece of legislation known as the Presidential $1 Coin Act of 2005 whose goal was “to revitalize the design of United States coins and return circulating coinage to its position as an object of aesthetic beauty in its own right.”
Presidents Honored on Coins
The US Mint then began producing the new $1 coins, each one depicting a past and deceased US president. The program was inaugurated with the production of 70 to 80 million coins for each one of four presidents chosen each year.
But the program was not a big hit. Over 40% of the coins were returned to the Federal Reserve “because nobody wants to use them,” according to the Treasury.
“As will shock you all, calls for Chester A. Arthur coins are not big,” said Biden, referring to the 21st president, who died in 1886. “I’m not commenting on his presidency, but it just is not very high.”
Consumer confidence in the US economy may be rising, if increasing use of credit cards and other forms of borrowing is any indication.
More Car and College Loans
October saw consumers borrowing more for the second straight month taking more loans to buy more cars and to pay college fees. They seem to be charging more as well to their credit cards. The increase in buying points to the chance that consumers are more comfortable with the economy and are willing to spend more in expectation of the coming holiday season.
Borrowing Going Up!
The Federal Reserve announced on Wednesday that consumer borrowing went up by $7.6 billion. The gains of September and October reversed what had been a continuing steep decline in borrowing since August, when it fell by its largest amount in 16 months.
Unemployment Coming Down
There are other signs of an improved overall economy in the US. In November the unemployment rate went down to 8.6%, its lowest in two and a half years. There have also been 100,000 more jobs generated in the last five consecutive months, the first time that has happened since April 2006.
The borrowing report of the Federal Reserve includes car loans, student loans and credit cards. It does not include, home equity loans, mortgages and other loans which are connected to real estate transactions.