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The six possible effects of the rising interest rates in the United States

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2016 ended with the announcement of the rising in interest rates in the United States. It is the second rise in interest rates in the United States in a decade and the first one in 2016. But, what effects is it likely to have?

10 january 2017

2017 has started in the United States with increased interest rates by the Federal Open Market Committee (FOMC) of the Federal Reserve and with the forecast of three more increases caused by inflation this year. In particular, rates have risen by 25 basis points, so they are now between 0.5% and 0.75%. We evaluate the consequences of this increase. 

  1. The dollar, the investors’ favourite currency: Investors from foreign countries will bet on the dollar, since they will be able to obtain a higher profitability. In the same way, savers will see that the interests of deposits will be higher. Raising interest rates can lead to raising wages and generate inflation.
  2. Returning debts contracted with the dollar will be more expensive: If the interest rates rise, debtors will have to cope with higher payments to repay their contracted debts.
  3. Traveling to the United States will cost more: In the field of tourism, if the currency is stronger, tourists will find it more expensive to travel to the United States. 
  4. Benefit for Spanish companies with business in the United States: The currency appreciation caused by the rise in interest rates will create greater benefits for companies that have most of the business in the United States, since they will generate income in dollars.

  5. Negative impact for financial markets: Generally, if interest rates rise, the prices of fixed-income bonds fall. Nevertheless, the increase in the profitability of fixed income makes in turn less attractive the investment in variable incomes, especially in emerging markets. 
  6. The price of raw materials falls: Especially oil, because of the inverse relationship between the US currency and the price of raw materials. 

Interest rates and monetary policies

Raising or lowering interest rates is one of the mechanisms that are used to modify monetary policies, which ultimately aim to control how many money circulates.

  • Restrictive monetary policy: Raising interest rates is one of the mechanisms used to implement a restrictive monetary policy, which will lead to a lower consumption and a stagnation of prices. 
  • Expansive monetary policy: Lower interest rates or reduce the cash ratio are some of the mechanisms used for applying an expansive monetary policy. The decrease in the volume of interest to be paid increases the income available for companies to invest and for families to consume.
 
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