The increase of interest rates came as no surprise after the Federal Open Market Committee (FOMC) meeting that took place the 16th of December. The rising rates were greatly anticipated and the market responded positively. The last time Fed raised interest rates was nearly a decade ago. I am sure that nearly everyone can remember it when the market took a hike in 2007 and drove us into one of our time darkest recessions, which later came to be called the great financial crisis. There have been a lot of discussions about the increase of interest rates but what does it really mean? How can we, in a fundamental way, understand what it means when the Federal Reserve (Fed) raise or lower interest rates? The paramount decision the Fed makes is that it can choose to loosen/ease or tightening the supply of money to its' banks and, consequently, its' citizens. For examples, almost every country today is retaining interest near, or even below, zero percent; but why?
When we hear about a decrease of interest rates, we would expect the cost to borrow, as well as the revenue from lending to go down. By allowing people and businesses borrow at a lower cost ensures that consumption and spending will increase in the future. That is, simply at its' core, the mechanism of "awakening" the country and telling it to start to consume and move the inflation rate closer to two percent. What we need to know right now is that this specific increase in interest rates is very low, and it is rather the future of this new trend that many is concerned about; not what will happen to U.S economy. Jennifer Blanke states that an interest rate will raise capital flow and lead to a stronger dollar; however, this is said to have minimal effect on U.S economy since exports are no big component. The concern lies within the effect the rise of interest rates will have on developing countries such as Brazil.
Brazil has had a steady flow of capital, which has in part contributed to its major growth. However, now that U.S has taken a stand to raise interest rate, the doors has been opened for investors to start pouring in money into its' economy; Brazil and other countries may face dire consequences. If capital were to start flowing away from Brazil and other developing countries, and into to U.S or other countries that may raise rates, then in the future they might see their own interest rate depreciate. A depreciation when it is not wanted can make exceedingly devastating damage to the economy. As for Brazil, that have averaged an 8 percent inflation rate in 2015, a depreciation of their interest rate could end up being a calamity for the nation.
Blanke, Jennifer. "3 Things That Really Matter amid the US Rate Rise Furore." ForumBlog. World Economic Forum, 17 Dec. 2015. Web. 29 Dec. 2015.