Hi Joey,
An increase in interest rates increases the cost of money. Companies borrow money to fund their operations. Higher loan servicing increases their cost of doing business. These are passed on to consumers. Our country has billions of dollars in foreign debts and a slight movement in interest rates could translate to billions of additional interest costs to our government. Money that could otherwise be used for (say) infrastructure that fuel growth and pump prime our economy would go instead to payment of higher debts.
Multinational companies access foreign credits and an increase in Fed prime rate increases their interest costs. Banks would demand a higher interest rate from their customers. We ordinary consumers are also affected. Higher housing loan interest rates which would discourage buyers, higher auto financing rates, higher credit card rates which could deter some impulse buying, etc. Businesses’ cost of capital would increase which could delay any planned expansion.
Hot money inflows to our country could fly back to the US because they would get more for their money. Again, that has a negative effect to our economy.
Any Fed rate increase or decrease is closely watched because it has a ripple effect globally.
When Uncle Sam sneezes, the whole world coughs.
Hi Ms. Annie. Thank you.