Monetary policy in the US, especially rising interest rates, has international repercussions. One of these is to strengthen an already strong dollar.

Question

Research and discuss the consequences of increasing interest rates on the US economy, taking into consideration the global ramifications.

Reply to classmate 1, and classmate 2 separately with detailed explanation.

Answer by Classmate 1:

Domestic Effects: Cost of Borrowing: As interest rates rise, borrowing costs increase for consumers and businesses alike. This can lead to reduced consumer spending on big-ticket items like homes and cars, dampening economic growth. Investment Impact: Higher interest rates can discourage investment in capital projects by increasing the cost of financing. This can slow down business expansion and reduce job creation. Housing Market: Rising interest rates can lead to higher mortgage rates, making homeownership less affordable. This may cool down the housing market, impacting construction activity and related industries. Inflation Control: Increasing interest rates is often a tool used by central banks like the Federal Reserve to control inflation. By making borrowing more expensive, it can help prevent an overheating economy and excessive price increases. 2. International Effects: Strengthening Dollar: Higher interest rates in the US tend to attract foreign investment as investors seek higher returns. This increased demand for the dollar can lead to its appreciation against other currencies, making US exports more expensive and imports cheaper. Trade Balance: A stronger dollar can worsen the US trade balance by making exports more expensive for foreign buyers and imports cheaper for American consumers. This can contribute to a widening trade deficit. Emerging Markets Vulnerability: Countries with significant amounts of dollar-denominated debt may face challenges servicing their debt as the dollar strengthens. This can lead to financial instability in emerging markets. Capital Flows: Higher US interest rates can lead to capital outflows from emerging markets as investors chase higher returns in the US. This can put pressure on emerging market currencies and financial markets. Global Growth: Tightening monetary policy in the US can have spillover effects on global growth, especially for countries closely linked to the US through trade and financial channels. Slower US growth can dampen demand for goods and services from other countries.

Answer by Classmate 2:

The U.S. interest rates can impact many other foreign countries, as many of them mirror the U.S. economy. Therefore, when the Fed conducts monetary tightening and slows growth in the U.S. , it will also likely slow growth in numerous other countries (Iacoviello & Navarro, 2018). These impacts of higher interest rates then cause emerging economies around the globe to find it challenging to borrow money due to the higher rates (Iacoviello & Navarro, 2018). As inflation rises here and globally due to those higher rates, it challenges the ability to repay debt and stifles those economies that are trying to emerge and grow by often times mirroring ours here in the U.S.(Iacoviello & Navarro, 2018). These higher rates trickle through other financial sectors to include foreign trade being affected both positives and negatively depending on those rates. Businesses especially suffer when rates increase because it limits their borrowing abilities in order for them to expand or grow and this could be critical in evolving parts of the globe(Iacoviello & Navarro, 2018). One last positive to higher rates here in the U.S. is that it actually could benefit countries with regard to value in their currency rising. Higher rates in certain currencies could spell a higher return relative to other countries currency (Bound-Team, 2022). Investors are often interested in investing in what they refer to as "hot money flows" as interest rates rise (Bound-Team, 2022).