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The Pros And Cons Of The Federal Interest Rate Hike

Washington

The United States Federal Reserve has just hiked interest rates to 1.75 percent. This move could well have a strong effect on the overall U.S. economy as well as the dollar in the short term.

While hikes in interest rates benefit some, they can also put others at a disadvantage. Exports, for example, could become less competitive, while imports could become cheaper. Here are some of the overall effects the Fed’s decision might have on the dollar and U.S. economy overall.

Dollar Could Appreciate

For those trading forex through online brokers like Oanda, the interest rate hike is likely to greatly benefit those who already have a stockpile of dollars. This is because the currency usually tends to appreciate when interest rates are raised (largely as a result of investors saving money in U.S. banks), which is why interest rate hikes are used to counterbalance rising inflation.

If the dollar does appreciate, then it will be more expensive for other countries to import U.S. goods, meaning that the U.S. exporting industry may suffer as a result. It may, however, also present good opportunities for U.S. investors abroad.   

Slower Economic Growth

Since interest rate hikes usually lead to less spending and more saving amongst the consumer population, economic growth tends to slow down. This means that more people will be inclined to save their money, and U.S. businesses in general may have to raise prices or control their spending to a greater degree.

Just how much U.S. economic growth slows down (or even if it slows down at all) depends largely on how consumers react to the hike, and to what extend confidence in the economy is impacted.

More Difficult to Borrow

Some may also see the cost of borrowing go up, especially with regards to mortgages and credit cards. The hike will likely have a greater effect on short term loans, but longer-term loans may also become more costly. Related: Russian Gold Reserves Hit Record High Amid Rising Tensions With West

Many businesses may also be concerned after the U.S. president, Donald Trump, signed an order to impose tariffs on steel and aluminium, which has instigated fears of trade wars occurring. With this most recent hike, it is likely that tensions could continue to rise, especially if the economic outlook worsens and business’s confidence is damaged.

Future Prospects

The U.S. is certainly facing a time of economic uncertainty. With many consumers, businesses and investors likely to be cautious, and more hikes expected throughout the year, it may be difficult for startup businesses to gain traction in such an economic environment.

That being said, those who start saving their money now may well have much greater spending power if/when interest rates go down again. Much will depend on future trade policy and whether sufficient foreign investment can be attracted despite the less competitive U.S. exports. Any appreciation in the dollar, as well as what rate it appreciates at, is also likely to have some bearing on future trading opportunities.

The Fed’s interest rate hike is likely to have a fairly significant effect on the overall economy as well as the dollar. It is likely that the dollar will increase in value, at least in the short term, whilst businesses and consumers may have to tighten their belts in order to navigate the hurdles which the hike may present. Although the future is uncertain, the most robust businesses and consumers should be able to endure the potential hardships presented, and even use the interest rate hike to their advantage.

By Vanessa Bastos

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