Tag Archives: interdependence

Global Implications of Rising Interest Rates in the United States

Markets around the world are watching the United States Federal Reserve Bank and its anticipated move to increase interest rates in the United States this afternoon. The Fed is widely expected to increase interest rates by .25 points today. For seven years, interest rates in the United States have been kept near zero in an effort to stimulate the economy. While inflation remains well below the Fed’s two percent target and unemployment is falling, albeit slowly, markets are watching for the Fed’s statement to signal whether it will continue to increase rates in 2016.

The US Federal Reserve’s Open Market Committee sets national monetary policy, largely by setting its benchmark interest rate on which many other interest rates in the country are based. But the interest rate has wide-ranging implications for the global economy. An increase in the Fed rate would likely result in an increase in the value of the US dollar relative to other global currencies, making US exports less competitive abroad. Because oil is priced in US dollars, an increase in the value of the dollar could make oil more expensive for other countries by increasing its price relative to local currency values. It would increase the cost of borrowing for both private individuals and countries.

What do you think? What are the likely impact of an increase in interest rates in the United States on the US economy and economies around the world? Should the Fed increase interest rates? Why?

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Economic Globalization Meets Shaky Economies: Fasten Your Seatbelts

Traders on the floor of the New York Stock Exchange on Thursday, when the Dow plunged more than 500 points.

Dramatic developments over the last few days have once again highlighted the interconnectedness of the world’s economies and the ease with which economic problems in one corner of the globe can quickly spread to others. Globalization refers to the integration of markets, cultures, and information networks and it has accelerated in recent decades with advances in communication technologies and increased global trade.

As reviewed in this timeline from BBC news, the 2007-2008 global financial crisis began with the sub-prime mortgage collapse in the United States, but economic turmoil quickly spread to Europe and beyond as banks that had invested in mortgage-backed securities suffered serious losses.  Similarly, the debt problems of Greece, Ireland, and Portugal since 2009 led to a decline in the value of the euro and have thrown the entire 17-country eurozone into crisis.

On Thursday stocks plunged on Wall Street; the Dow fell over 500 points in the biggest single day loss since 2008. Interestingly, most analysts attributed the selloff not primarily to concerns about the American economy, but to fears about the solvency of Italy and Spain–the third and fourth largest eurozone economies behind Germany and France.  The threat of a “contagion” effect is highlighted in this explainer from CNN:

“…Anxieties over Italy’s economic future have led many to wonder what its default might mean for Europe and beyond, with the dreaded word ‘contagion’ on many lips. [Former IMF executive board member Domenico] Lombardi believes the current situation is serious. ‘If you affect Italy, you can really weaken the euro significantly,’ he says, describing it as the ‘weakest link’ among Europe’s big economies.  Worse, he says, the European Union, the IMF and the European rescue fund do not have enough money to bail it out as they did smaller European economies — sparking a potential domino effect. So far the crisis has been limited to Greece, Ireland and Portugal, he said.  ‘But of course if the crisis was to hit Italy, it would spread also to France, to the rest of the euro area, and of course you would have contagion to the U.S. through the banking system.’ The huge public debt held by the United States also would make it more vulnerable to speculators, he added.”

How Standard and Poor’s decision (announced late Friday) to downgrade the U.S. credit rating will affect the global economy is the subject of great speculation this weekend. Officials from the G-7 and G-20 groups of major economies are holding conference calls this weekend to plan for further turmoil in the financial markets.

Is there anything individual countries can do, in a globalized world, to limit the damage they may suffer from a possible global contagion, or are they and their citizens at the mercy of the world economy?  Could protectionist trade practices and other tools of economic nationalism safeguard the U.S. or would this only make problems worse?