If interest rates go up in the USA, will this be good for their economy?

Question

Is it true that if the U.S. interest rates go up, the US dollar gets stronger? Why are people afraid of interest rates going up? Isn't that good for the US economy?

Answer 1

It depends on the state of the economy. When the economy is heating up too fast (headed for inflation), the fed raises interests rates to "cool it off". High interest rates make things more expensive (because it costs more to borrow money), but they also help to avoid inflation by curbing demand. When interest rates are high it becomes more attractive to invest in US bonds (and so on down the banking system). When that happens there is less currency in circulation because it's tied up in bonds and elsewhere. This in turn makes the currency that is still in circulation more valuable. A strong dollar makes it easier to import, and a weak dollar makes it easier to export. In simple terms importing is great because that means you have a lot of new toys to play with. Exporting is also great b/c that means you're making money.

Obviously its a little more complicated than that, but that's a general picture. People are afraid of a weak dollar because they don't understand economics and the word "weak" sounds bad.

Interestingly enough the Japanese and other Asian countries have been called addicted to the US dollar and a weak currency. This is because they buy and hold trillions of dollars in order to keep it strong relative to their own currency. This makes it easier for those countries to sell their products to US consumers. So in that case a weak currency is good for them. Again, there are a lot of other implications, but you can't say weak or strong is necessarily a bad or good thing.

Answer 2

If the US dollar goes down, the foreign investors will find that the return they get on their investments in the US in dollars will buy them fewer units of their local currency so they will tend to dispose off their investments in the US and buy assets elsewhere. This would mean more dollars for selling in the market and therefore more depreciation of dollar. So, interest rates would rise to compensate the foreign investors to stay back in the US so that the dollar does not fall.. In fact even an American investor will like to invest abroad rather than in the US . So, interest rate increase folloing a dollare depreciation becomes a necessity for the management of the economy. But rise in interest rates may hurt fresh investments in the US. This is bad for the economy/
There is nothing in economic which are just good or bad. It depends on the context in which something rise or fall in value. If the economy is weak fundamentally, in terms of spilralling govt expenditure on unproductive purposes and subsidies, if the savings are low because people want to consume more and more in the prsent than think about the future, if technogical progress is slow and therefore gains in productivity and efficiency do not rise fast enough, the problem continues. If the domestic demand is higher than domestic supply, prices will tend to rise. If there is inflation, it means the purchasing power of money should fall. If the value of money falls, people will demand higher compensation for deferring consumption to future periods,. This means interest rates rises. An economy is a interlinked system There is nothing good or bad. All economic variavles will affect each other in a way that they tend to become internally consistent over time.

Answer 3

No it means you are paying more back every time you borrow money. Say you borrow $100 at 6%. You pay back $106. At 8% its $2 more. That adds up fast on something like a house or a car.

Answer 4

Well, good for the government only, the people will get poorer. People will lost houses, what come to worst ............. they cannot afford their kid's education fees. Will you like that?

Only rich people never concern with this rising interest rates.