Will Higher Interest Rates Hurt the US Economy?

Markets are anxiously awaiting news from the US Federal Reserve. Will the Fed finally raise interest rates? Will higher interest rates hurt the US economy? How high will the US dollar climb versus other currencies if the Fed raises rates? And, how high might interest rates go? The International Business Times reports that markets are mixed ahead of the Fed meeting.

European markets continued to witness wide fluctuations Tuesday as anticipation built up over one of the most eagerly awaited U.S. Federal Reserve announcements in recent years. Investors worldwide are watching the Fed to see if it will hike interest rates Thursday – for the first time in nearly a decade.

The pan-European STOXX 600, which opened slightly higher before falling into the red, was trading 0.3 percent higher. Germany’s DAX was up 0.5 percent and France’s CAC 40 was trading up 0.9 percent. London’s FTSE 100, which fell nearly 1 percent during the day’s trade, pared its losses and was trading flat.

U.S. stock futures also recovered slightly, pointing to a slight opening rise for the Dow Jones Industrial Average and the S&P 500.

If the Fed raises rates the USD will climb against other currencies. US exports will become more expensive and imports will become cheaper in the USA. To the extent that this hurts the US economy the dollar will fall in a self-correcting market. Will higher interest rates hurt the US economy? They will only hurt momentarily as a damaged economy drags down the value of a currency. The other side of the question is what happens if the Fed does not raise interest rates?

Better to Get It Out of the Way

The threat of higher interest rates has been hanging over the markets for well over a year. Some have suggested that the best course of action would be to get the interest rate increase out of the way and let markets adjust. To a degree higher rates have already been discounted by the market.

Does It Make Any Difference?

Forbes contends that the Fed raising interest rates will have little effect on credit as an interest rate hike will only affect banks and 85% of all lending does not come from banks!

The Fed interacts with banks, buys interest-bearing assets from them in order to increase the dollar amount of credit they can lend, but then the banks are a rapidly shrinking percentage of total lending; 15 percent by most recent estimates.  Assuming the Fed hikes, and shrinks the amount of dollar credit in banks, it’s not as though the supply of loanable funds in the U.S. is static.  Figure 2/3rds of all dollars have “foreign addresses” (usually foreign banks in New York) whereby they constitute savings untouched by the Fed’s shrinking cry for relevance.  If the Fed “tightens,” global sources of dollar credit will make up for what it allegedly takes from the U.S. economy.  Of course, assuming the Fed tightens, it’s in no way shrinking the credit base.

The credit worthiness of a company is what makes it credit worthy. As the Forbes article notes Apple will always get credit at the lowest possible rate and Radio Shack will always need to pay high interest rates providing that they can get credit. So, will higher interest rates hurt the US economy? The folks at Forbes do not think so.