Americans have often been rightfully accused of being overly “Americentric,” but there’s no doubt that in a global economy, fluctuations in U.S. markets affect the rest of the world. The financial media have lately been on fire with the news that the Federal Reserve, fondly (or not so fondly) known as the Fed, is expected to raise interest rates for the first time since 2006. The impetus is a combination of factors, including sufficient improvement in employment in the years following the global financial crisis, as well as stability in inflation.
Some are heralding this move as the beginning of the end of “cheap money.” Yet many experts say that it will have little to no immediate impact on savers, borrowers, lenders and investors; in fact Fed Chair Janet Yellen has promised that cheap money will fade slowly rather than abruptly disappearing.
Winners and Losers
To be sure, rock-bottom interest rates provided benefits for many consumers. Everyone from car dealers to furniture stores offered next-to-nothing financing and installment plans that they promoted as being nearly the same as paying cash. As well, homebuyers and those seeking refinancing of their home loans were able to lock in low mortgage rates. Builders also benefited as the demand for housing grew.
The business world benefited too; many companies have been able to borrow more inexpensively and to refinance their debts at progressively lower rates. This was all part of the Fed’s master plan, and some wish it would go on at least a little longer. Indeed, some U.S. industries that are currently hurting, such as manufacturing and exports, are not exactly welcoming the prospect of higher interest rates with open arms.
For savers and investors it is a different story. Zero interest rates put a real damper on many people’s retirement plans, prompting many to turn to the stock market instead of savings and CDs. Accordingly for millions of investors and savers alike, an interest rate hike can’t come soon enough.
But what about the rest of the planet?
What the world needs now…
No, it’s not “love, sweet love” as the old song would have it. Granted, a little more love wouldn’t hurt, but what the financial world really needs, say some observers, are higher U.S. interest rates. Beyond the advantage to U.S. savers and investors, the rest of the planet will benefit too. And while some investors argue that a raise in interest rates will be a mistake, others say the opposite is true and that it would be a mistake for the Fed not to act now.
Economist Diana Choyleva, writing in the Wall Street Journal, says that if the Fed fails to raise rates it will ultimately cut the economic recovery short, not just in the U.S. but also in the rest of the world. Since the U.S. is no longer in crisis mode a rate hike is appropriate and necessary, and emerging markets in particular will see gains from monetary normalcy.
The Fed seemed all set to raise rates back in September 2015 but decided against it, largely because of events in China and resultant miscommunications that led policy makers to believe the Chinese economy was in much worse shape than had previously been thought. But now the time has come for a rate hike, and though this will cause some short-term volatility in emerging economies, it will ultimately benefit them.
As Ms. Choyleva points out, “…investors have been pulling their money out of emerging economies not because of the prospect of fractionally higher U.S. interest rates but because of the manifold policy shortcomings in countries such as Brazil, China and Russia. The money will return when their policies improve. And the right incentives for improvement will come in a global monetary environment where investors aren’t so desperate for returns that they’re prepared to overlook a country’s policy failings.” In other words, somebody has to make the first move. On a global scale, higher interest rates are a win.
The Borrowers Afloat
Where does this all of the above leave borrowers, particularly consumers who are seeking loans? As noted above, borrowers and lenders won’t see any immediate radical effects from U.S. interest rate hikes. In the U.S. as in other parts of the world, borrowers with a better credit record will get better deals on loans. That isn’t going to change, no matter what happens with interest rates. The principles of sound personal money management will remain the same no matter what policymakers in the U.S. do or don’t do.
What consumers can do to improve their own situation is to get their unnecessary spending as well as their debts under control. When they need to borrow money it is imperative that they get a handle on what they can realistically afford to borrow, and then shop around to compare loans so they can get the best deal. Even a consumer with poor credit has choices when seeking a loan – and granted, for some of these folks the whole concept of “cheap money” is moot – but, as with any other consumer product, some choices are better than others.