US Move to Raise Interest Rates Could Have a Big Effect


26 September, 2018

The United States central bank raised its main interest rate Wednesday for the third time this year. The rate increase could affect not only the U.S. economy, but economies around the world.

Experts say the move could mark the end of what has been called the central bank's "accommodative" policy. That monetary policy was put in place after the international financial crisis 10 years ago. With it, bank officials sought to fuel economic growth through low interest rates and big loans.

On Wednesday, the U.S. Federal Reserve Bank raised its federal funds rate to between two and 2.25 percent. Big, private banks pay this rate for short-term loans from the Federal Reserve, but it affects many other kinds of loans.

Economic measures remain strong

Observers note that almost all important measures of the U.S. economy are strong. From April to June, the economy grew at a faster-than-expected rate of 4.2 percent. Nationwide, unemployment remains near a record low of 3.9 percent. And consumer confidence measures, which show Americans' willingness to spend, have reached their highest level in 18 years.

Low unemployment means the country has a shortage of workers and pay is likely to increase.

The Associated Press reports that Federal Reserve policymakers believe wages will increase in the coming months. That will put pressure on the group that controls the U.S. monetary policy, the Open Market Committee. The committee might feel pressure to raise interest rates to reduce the risk of high inflation.

Raising interest rates makes borrowing more costly. This usually slows economic growth. But it can also increase the value of U.S. money on foreign exchange markets.

The strength of the American economy has already caused the value of the U.S. dollar to rise in other areas.

That could hurt countries like Turkey.

This month, the Turkish central bank increased its main interest rate by more than six percent in an effort to stop the fall in value of Turkey's currency, the lira.

But the lira has lost nearly 40 percent of its exchange value against the dollar this year.

Argentina, South Africa and Indonesia are just some of the other countries facing big drops in their currencies.

Effects of the U.S.-China trade dispute

Adding to these concerns is the trade dispute between the United States and China. On Monday, the U.S. government enacted import tariffs on $200 billion in Chinese goods. China has answered by announcing new taxes on $60 billion in American goods. Trade talks set for October have been cancelled.

Officials at the Asian Development Bank, based in Manilla, do not believe the trade dispute will affect growth in East Asia this year. But the bank predicts growth will fall from 6 percent to 5.8 percent in 2019.

The bank also predicts that the trade dispute could reduce China's economic growth by .5 percent and U.S. growth by .1 percent.

I'm Susan Shand.

Mario Ritter adapted this story for VOA Learning English from Reuters, VOA News and AP stories. George Grow was the editor.

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Words in This Story

accommodative – adj. providing what is needed or wanted

monetary – adj. related to the money in a country's economy

consumer – n. a person who buys goods and services