Three Bad Things about Higher Interest Rates

The United States economy has been steadily improving and now the US Federal Reserve is getting ready to raise interest rates. There are three bad things about higher interest rates. The first is that it will drive up the price of the dollar and make US exports less competitive. The second is that it will make doing business more expensive in the USA and serve to choke off the recovery. The third is that higher US interest rates will drive investment capital into the USA and away from emerging markets that are struggling. Let’s talk about the first of three bad things about higher interest rates, a higher priced dollar.

The Dollar Rallies

Reuters reports that as the dollar rallies, stocks, oil and other commodities are hit.

The U.S. dollar rallied across the board on Tuesday as the prospect of the first rise in U.S. interest rates in almost a decade stoked global volatility, hitting stocks and commodities. A resetting of expectations on the likely timing of the Federal Reserve interest rate hike in nearly a decade was the main driver for Tuesday’s selling in equities, analysts said.

The benchmark S&P 500 stock index fell to a one-month low, with concerns over Greece adding to the bearish mood. Technical negotiations intended to prevent Greece going bankrupt and potentially being forced to abandon the euro bloc will start in Brussels on Wednesday. U.S. crude futures fell near $49 per barrel and Brent dropped more than 3 percent below $57, while copper lost almost 2 percent, weighed also by a continuing slide in China’s producer prices. China is a major consumer of the metal.

A Reuters poll after an unexpectedly strong February U.S. jobs report Friday showed many of Wall Street’s top firms were now convinced the Fed will raise rates in June.

US exporters are concerned as are their shareholders as a higher dollar will serve to price them out of many foreign markets.

An Increased Cost of Doing Business

Stocks took a hit on expectations of an impending interest rate hike. The Salt Lake Tribune reports on the Fed rate hike.

U.S. stocks fell sharply as fears over possible interest rate hikes by the Federal Reserve roiled financial markets around the globe. In Europe, investors dumped stocks and fled to government bonds, pushing yields to record lows. The euro sank to a 12-year low against the dollar.

US manufacturing has been growing ever since the Great Recession started to mend. The USA is currently looking at a shortage of skilled workers. That might change if the cost of doing business via an interest rate hike makes manufacturing in the USA less profitable. There lies the second of three bad things about higher interest rates.

Foreign Markets Will Be Hurt

Higher interest rates in the USA will attract Forex capital and investment. This will suck money out of emerging markets and reduce the money needed to buy US products. It will also aggravate the trouble that economies are having from China to Brazil to Japan. The Economic Times reports that emerging markets are spooked by the prospect of higher US rates.

The US dollar scored multi-year highs against the euro and yen in Asia on Tuesday amid starkly diverging outlooks for interest rates globally, while currencies from emerging markets came under mounting pressure from risk aversion.

The skittish mood spread to Asian stocks as MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.6 percent.

Driving the dollar was speculation the Federal Reserve would start lifting interest rates from mid-year, while central ban.

The dollar is going up while the Euro, Yen and Yuan are going down. Investors will be looking for higher rates in the USA and that cash flow will hurt foreign markets, thus the “skittish” mood across Asia and elsewhere. That is the third of three bad things about higher interest rates.