Recently, the question of the possible consequences of a rate hike by the US Federal Reserve has been of considerable interest in financial and economic circles. There are two main hypotheses about the possible consequences: the first is that it could lead to an increase in inflation, and the second is that it could lead to a decrease in economic growth. Let’s take a closer look at these two hypotheses.
A Fed rate hike could lead to higher interest rates on loans, which would increase the cost of borrowing for banks and other financial institutions. This could lead them to increase interest rates on loans to businesses and individuals. This may result in additional demand for money, i.e., an increase in demand for goods and services, which will lead to an increase in their prices, i.e., inflation.
Alternatively, a Fed Funds rate hike could increase the cost of investing in stocks, bonds, and other financial instruments, which could lead to a decrease in their demand. If the demand for these instruments decreases, their value also decreases. This may result in a decrease in the capitalisation of companies, which reduces their ability to invest and develop, as well as a decrease in their own funds required to obtain loans for development.
The second hypothesis is that a Fed Funds rate hike could lead to a reduction in economic growth. If the cost of borrowing increases, companies and businesses may reduce their investments, which in turn could lead to a decrease in output and employment. Also, a decrease in demand for stocks and other financial instruments could lead to a reduction in the capital needed to invest in development and create new jobs.
An increase in the Fed Funds rate could also lead to an increase in the value of the dollar, which could reduce the competitiveness of US export goods and services on global markets. This could result in a decrease in exports and an increase in imports, which could lead to a decrease in foreign exchange reserves and a deterioration in the foreign trade balance.
Thus, a Fed rate hike could have implications for both inflation and the economy as a whole. On the one hand, it could lead to higher prices for goods and services and a reduction in investment and corporate development. On the other hand, it could lead to a decrease in employment and exports of US goods and services. Thus, the Fed’s rate hikes should be carefully considered and implemented to strike a balance between inflation and economic growth.