U.S. Interest Rates and What It Means for the Global Economy

As of late, there has been a lot of talk of whether the United States Federal Reserve Bank will raise interest rates in September. Typically, the Federal Reserve would raise its benchmark interest rate when the economy is growing too fast to encourage people to spend less and save more. This slows the economy down, thereby reducing inflationary pressure. A raise in interest rates signals a perception that inflation is rising and that the economy is healthy and growing.

Raising interest rates in the U.S. is risky due in part to uncertainty in the global markets and the possible future impacts. Although there has been relatively low unemployment, wage growth has been modest. This suggests that wage-driven inflation has not occurred yet. Talks of the Federal Reserve raising rates has caused turmoil in the global markets, which has put downward pressure on commodity prices. In addition, it played a role in raising the value of the dollar and has impacted emerging markets. The uncertainty also lies in that if the Federal Reserve waits too long to raise rates, inflation could rise. The Federal Reserve noted that low interest rates can encourage risky investments that can be the base of financial turmoil in the future. Another concern that was noted was that if inflation is allowed to rise above 2%, people could lose confidence in the Federal Reserve’s ability to keep price increases under control, potentially leading to higher and more volatile inflation rates.

Low U.S. interest rates have been felt globally and have had a substantial economic impact. Due to low interest rates, Chile is faced with rising inflation, with its annual inflation rate consistently above the target range of 2 to 4 percent. Switzerland was forced to keep rates negative after removing the cap on the franc, resulting in the currency soaring and putting a large strain on the largely export-dependent economy. A few nations have openly asked the Federal Reserve to raise rates sooner rather than later to help return their financial markets to normalcy. For example, Indonesia has urged the Federal Reserve to raise interest rates, as the uncertainty has created a downward pressure on the Indonesian rupiah, which is now undervalued.