The Federal Reserve Bank
The Federal Reserve BankiStock

Since the beginning of 2022, the US Federal Reserve System, the central banking system of the United States of America, has implemented a rise in interest rates.

Predictions are set for the US Federal Reserve to continue rising interest rates, which may have serious consequences on other worldwide economies. This article explores how the rise in interest rates in America will impact the rest of the world.

What Is the US Federal Reserve System?

The US Federal Reserve System is the central banking system in the USA. Also commonly referred to as ‘the Fed,’ it was created in 1913 and has since regulated money and financial policies in the USA. By consequence, the Fed also sets the nation’s interest rates to help keep the economy afloat.

Why Interest Rates May Rise

The Fed began raising interest rates in March 2022, and interest rates are expected to continue rising. As a consequence, the cost of living will rise and the cost of loans will too. Therefore, mortgages, auto loans and other types of short and long-term loans will become more expensive with interest rates going up.

Accordingly, the Fed is set to continue raising interest rates until inflation settles to around 2-3%. Historically, the raise in interest can vary between 2-5%, so there is potential for the Fed to even raise interest rates more depending on the economy.

How US Interest Rates Affect the World

America has one of the largest economies and is one of the major influencers when it comes to the global market. Therefore, in short, if the Fed raises interest rates, this will then have an impact on other countries’ economies.

The main reason being is that the dollar, the US currency, is the benchmark for many other global currencies. Particularly when exchanging and purchasing international and overseas products, ranging from a VoIP phone system to children's toys to sell online, the performance of the US economy and the dollar can make a big difference in many ways.

Following World War 2, USD has since become the benchmark for other currencies and exchange. In short, by the Fed raising interest rates some countries can expect to see their currencies weaken and will in-turn have a negative impact on the health of their economies.

Hugo Anglesford of Doddler commented: “As the saying goes,’when the US sneezes, the world catches the cold.’ What is important to consider here is that interest rate rises affect more than just governments. Don’t forget that if you have a mortgage and interest rates rise, in many cases, so will your repayments and even if you have outstanding credit, be that in the form of payday loans and credit cards or car finance and second mortgages, you may well find rates rising for you too. It is therefore very important we all maintain a level of understanding and awareness when it comes to interest in the US or indeed the UK or elsewhere.”

The US may then have an advantageous position when it comes to exporting products and services. As interest rates rise, and other economies weaken, the US may find themselves as a strong frontrunner when it comes to exporting goods for higher prices.

The Bank of Israel has also set out that interest rates may also rise alongside the Fed’s to help combat inflation. By the end of 2022, the Bank of Israel may raise interest up to 3.5%. However, what’s to come following the Fed’s continuous rise in interest rates is unclear and whether it will help settle inflation.

As the war in Ukraine continues, and energy costs and demand for goods remains worldwide, it can be for certain that the Fed will continue to raise interest in the USA. By September, the Fed had already raised interest rates by 3.25%, and we can expect to see this figure rise. How this will specifically impact economies long-term worldwide is currently unsure.