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Economic Daily News: Prepare for U.S. interest rate hikes

Economic Daily News: Prepare for U.S. interest rate hikes

After the United States reported strong employment figures in October and as China's economy has gradually broken away from the threat of a hard landing, it is almost certain that the U.S. Federal Reserve will raise interest rates in December.

In fact, raising interest rates may help stimulate the U.S. economy. Because the average American household's mortgage and car loans are mostly borrowed at long-term fixed interest rates, a hike in interest rates will not increase the burden on these households but will increase their interest income from deposits.

As the hike will widen the difference between lending and borrowing interest rates, banks will be more willing to ease lending standards, which will further heat up the housing market.

More importantly, after interest rate hikes, it will become more difficult for the business sector to use financial management to raise their net profit, and it will be harder for companies to boost their share prices via methods such as share buybacks, increasing dividends and acquisitions.

Companies will have to increase their capital spending to raise productivity. Since the start of November, the U.S. dollar has appreciated 3 percent against the euro. When the monetary policies of Europe and America become clearer, the U.S. dollar is expected to appreciate further.

The U.S. stock market will not suffer a major impact in the short run, because raising interest rates will demonstrate that the Fed is confident in the economy, and confidence is an important force supporting the stock market. In the middle- to long-run, although the U.S. economy will not suffer a recession, the profitability of businesses will enter a "recession period" due to the strong U.S. dollar and falling oil prices.

Bearing the brunt will be emerging markets, especially raw material exporting countries. An appreciation of the U.S. dollar will soften prices of raw materials and reduce the income of emerging markets. This will also increase the cost of repaying foreign debts.

As an emerging economy, Taiwan will also face currency depreciation pressure. Fortunately, Taiwan is not a raw material exporting country and its foreign debt is low. But Taiwan's stock market will likely suffer a mild pull-back due to an outflow of capital. (Editorial abstract -- Nov. 16, 2015) (By Y.F. Low)

Updated : 2021-09-29 03:31 GMT+08:00