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Rate Hike: Trouble Ahead

On December 16th, the Fed hiked interest rates for the first time in nearly 10 years. The world did not come to an end, but there is clearly trouble ahead. In the latest Macro Watch video, we take a look at what the Fed has done and the reasons they gave for doing it. We also consider the negative consequences that are sure to result from rising interest rates.

So long as rates continue to rise, the US Dollar will continue to strengthen. A stronger Dollar will push down commodity prices further and cause more pain for the commodity producing countries, from Brazil to Russia to Australia and beyond. The economies and currencies of those countries are likely to weaken further as a result. The stronger Dollar will also negatively impact US manufacturers and reduce US exports. If China continues to devalue in response to these rate increases, as seems likely, all of these problems will be exacerbated.

Rising interest rates are also likely to cause credit growth in the United States to slow. That is a worry because credit growth is the main driver of economic growth – and credit growth is already quite weak to begin with.

The biggest danger of all, however, is the risk that higher interest rates will cause asset prices (such as the price of stocks and property) to decline. If they do, the US is almost certain to fall back into recession, dragging the rest of the world along with it.

Finally, we consider why it probably won’t be long before interest rates return to zero.

Rate Hike is 25 minutes long and contains 40 downloadable slides. If you are a Macro Watch subscriber, log in and watch it now.

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