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Interest rate increase could hurt U.S. manufacturers

Financial analysts continued to dice up the Federal Reserve’s 0.25 percent rate hike.

Financial analysts continued to dice up the Federal Reserve’s 0.25 percent rate hike, wondering how or whether it will have negative or positive effects on the still fragile U.S. and world economy — and some are suggesting that American manufacturers could be most hurt by the increase.

The balance is tricky as regulators seek to avoid an overheating economy and rising inflation, referred to as “fire” in an analysis by The New York Times, while also avoiding “ice,” which comes with excess capacity, weak demand and falling prices that trigger a deflationary slump.

Officials can look to European regulators, who raised rates twice in 2011, killing a “nascent recovery and plunging the eurozone into a double-dip recession that it is still struggling to overcome,” the analysis said.

Being too slow to tighten the reins of monetary policy can be troublesome, too.

A series of steady quarter-point rate increases by the Fed between 2004 and 2006 seemed prudent at the time, but in hindsight the central bank has been blamed for moving too slowly, failing to head off the economic catastrophe that followed the implosion of the housing bubble in 2007.

The biggest problem is that higher interest rates do not bite in predictable ways. Not only do they take time to percolate through the real economy, but there is also a difficult-to-foresee threshold at which the impact can suddenly shift from mild to severe.

“I’m sure there is a tipping point,” Mike Ryan, chief investment strategist for UBS Wealth Management Americas, told the Times. “It’s just hard to know in advance precisely where that is.”

The European Central Bank has belatedly followed suit with American policy, buying up securities and putting money into the financial system, and is under pressure to further loosen monetary policy. In Asia, the People’s Bank of China is also in an easing mode. Japan’s central bank is keeping interest rates at rock bottom.

The combination of lower rates abroad and rising ones at home is making the U.S. dollar surge against other currencies. Although that might be good for American tourists heading overseas, it hurts American manufacturers that are seeking export markets and it makes imported goods more competitive, undermining the country’s trade balance.

For now, most economists say the danger of too little inflation outweighs the risk of too much: Ice, in effect, may be more of a worry than fire.

“The risk is skewed toward moving too fast,” said Michael Gapen, chief U.S. economist at Barclays. “That’s especially true as the strong dollar and lower-priced imports keep inflationary pressures at bay in the United States.”



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