Afriex Insights

The Effect of Rising American Interest Rates on Global Commerce

The United States Federal Reserve has raised interest rates consistently and periodically over the last few months to combat rising inflation. Rising interest rates are supposed to encourage US citizens to save rather than spend. As a result, when rates rise, it costs more to borrow and yields more to save. 

The FED funds rate specifically impacts how much commercial banks charge each other for short-term loans. This reduces the demand for banks to borrow money. Rising rates make it more expensive for individuals or businesses in the United States to borrow money. It encourages everyone in the US economy to save more. 

The Effect on Business Growth in the US

Rising rates usually signal slower growth for the United States economy. People are expected to save more and spend less, reducing consumption and increasing savings. Businesses will not have the same access to debt markets and, as a result, may spend less on investment and expansion. Higher costs yield lower growth rates for companies across the board. With less access to credit markets, businesses are disincentivized from spending more today for growth. As a result, the stock market and the outlook on the equity market tend to go down when interest rates rise in the same country. 


The goal of the FED in raising interest rates is to reduce inflation and stabilize unemployment and labor participation levels. However, interest rate hikes typically cool the labor market, leading to higher unemployment rates in the short term. Cyclical unemployment tied to the interest rate tends to hit less educated workers in poor regions the hardest. This also has the effect of reducing spending, as fewer people have jobs to spend in the U.S. As a result, in the short term, it may be less likely for employment to be more attractive in the US relative to other countries. 

The Effect Everywhere Else

Higher interest rates in the United States tend to attract foreign investment. This will have the long-term benefit of increasing the real value of the United States dollar. As inflation reduces, the real value of the dollar increases. As the dollar appreciates, the exchange rate between other countries and the US tends to widen. Debt owed in USD to other countries now costs more in real terms. Dollar-denominated debt in countries such as Brazil and South Africa will increase in real terms. The dollar is stronger, and other currencies become weaker relative to it. This makes imports more expensive for other countries. 

Real Purchasing Power Parity

Goods that can travel (nonperishable) are vastly more expensive for other (especially developing) countries when rates rise in the U.S. Since the dollar is stronger relative to other currencies because of higher interest rates, the nominal price of goods is higher in other countries. If you wanted to send money to your brother to buy an iPhone in Ghana, the prices would increase because the dollar is stronger. The conversion rate for currencies into USD is also now higher. $1 may be 11.18 GHS today, but if the FED raises rates tomorrow, then $1 may be 11.25 GHS. It may now cost 11.25 GHS to buy $1 worth of goods, rather than 11.18 GHS. As a result, many other nations are pressured to raise rates when the U.S. does. 

Text Link

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Duis cursus, mi quis viverra ornare, eros dolor interdum nulla, ut commodo diam libero vitae erat. Aenean faucibus nibh et justo cursus id rutrum lorem imperdiet. Nunc ut sem vitae risus tristique posuere.


Related Articles

No items found.

Choose how your money