The Impact of Rising American Interest Rates on the Global Economy

The increase in United States interest rates, especially those set by the Federal Reserve (Fed), has a significant impact on the global economy. This influence extends to various aspects, from the capital market to the monetary policies of other countries. First, rising interest rates often cause the US dollar to strengthen. When the Fed raises interest rates, higher yields attract foreign investors to place their funds in dollar assets, such as US government bonds. As a result, the dollar exchange rate strengthened against other currencies. Countries with dollar-denominated debt could face greater challenges due to rising dollar-denominated debt loads, potentially creating a debt crisis in developing countries. Second, the impact on global market capitalization is very pronounced. As interest rates rise, borrowing costs become more expensive. These increases affect companies’ access to loans, which can limit investment and growth. Investors tend to move from stocks that are considered risky to safer instruments, such as bonds. This could depress global stock markets, reducing investor wealth and reducing household consumption. Third, the global property sector is also affected. Higher interest rates mean mortgage costs rise, making homeownership less affordable in many countries. In conditions where the property market is already under pressure, an increase in interest rates can result in a decrease in property prices, thereby worsening the economic situation. Fourth, the impact on other countries’ monetary policies must be taken into account. Many countries will respond to a rise in US interest rates by raising their interest rates to maintain the value of the currency and avoid capital outflow. This can limit their room for fiscal and monetary stimulus, especially for developing countries that are dependent on foreign investment. Fifth, international trade relations also have the potential to be disrupted. A stronger dollar can make US goods more expensive for other countries to buy, thereby reducing US exports. It can also worsen the trade balance of countries that import more than they export, potentially causing trade tensions. Sixth, global inflation could also increase due to rising interest rates in the US. Countries that depend on dollar-denominated raw materials and commodities will experience higher costs, driving inflation to higher levels. This adds to the difficulty for central banks around the world in managing inflation and economic growth simultaneously. The increase in US interest rates is an indicator that influences global economic dynamics. From its impact on exchange rates to uncertainty in investment, many countries have had to handle the consequences carefully. The decision to raise interest rates not only affected the US domestic economy but also shook the stability of the global economy as a whole. Economists around the world continue to monitor US monetary policy to understand how their economies will be affected. It is important for countries to prepare for the challenges posed by fluctuating global interest rates.