US economic growth in third quarter has been revised up at an annual pace of 2.1%, not the 1.5% rate it reported last month. The stronger investment and house building was the trigger of economic growth in third quarter, though the consumer spending was revised down slightly. However, the growth based on GDP revision still slowed from an annual pace of 3.9% in the second quarter. Will the better third quarter growth push US Federal Reserve to raise interest rate at the end of this year?
Earlier in this month, the US Federal Reserve chair Janet Yellen said the committee has made no decision yet but that December rate hike was still a live possibility. This statement came up because the economy will continue to grow at a pace that is sufficient to generate further improvements in the US labour market and to return inflation to 2% target. Nevertheless, some people disagree with the interest rate hike plan.
In the circumstance like nowadays, the interest rate hike is inappropriate policy. I believe that this strategy will harm the US and global economy. There are two main reasons why interest rate hike policy is bad idea. First, the interest rate hike will strengthen the US exchange rate. Many investors will invest their wealthy in US dollar which eventually causes the demand for US dollar rise. It will push the demand side upward and increase the price the US dollar to meet new equilibrium. Consequently, the exchange rate of other currencies will sharply fall. This already happens now in which the most currencies are weakening against US dollar since Janet Yellen stated the plan to raise interest rate.
Second, the further impact of the US interest rate hike is the US export value down sharply. All goods made in US will have price higher than other similar goods made in other countries due to the US exchange rate rise. It will be a disadvantage for the US economy. The export value down will apparently harm the labour market within the US. Many companies may cut their employees in order to make it more efficient. The social problems within the US will increase significantly if the number of unemployment rises.
In conclusion, the strong economic growth of the US is a good news for the US and global. It will push global economic growth upward, yet it will not increase the US interest rate. Though the likelihood of interest rate in December can happen, the US Government and Federal Reserve will take decision cautiously. Increasing interest rate will give bad influence for US economic growth. Instead of increasing interest rate, it would be better to Federal Reserve take a decision to revive global economic growth.
