The Federal Reserve is poised to raise short-term interest rates later this year. The word “patient” was omitted from the Fed’s March statement, prompting talk of a rate hike as early as this summer. While many view this as bad news, higher rates can be a good thing. For starters, higher rates are evidence of an economy that has truly recovered, according to Stanley Bergman, CEO of health care giant Henry Schein.
“Interest rates going up are directly correlated with a better economy,” Bergman said in a Fortune.com interview. “I’d rather have a better economy and pay a little more interest.”
In addition, some economists believe higher interest rates will have a positive effect on the economy. Bruce Bartlett, former White House economist, has for a few years been saying we need higher rates. He argues that low rates reduce the investment income of millions of Americans and reduce the incentive to save for retirement. Bartlett also believes artificially-low interest rates hurt the housing market.
“Low rates and the perception that they will continue indefinitely discourages home buying,” Bartlett wrote in The Fiscal Times.
Higher interest rates can be good for small businesses, as well, because low interest rates discourage banks from lending. Historically, low rates have made loans less profitable for banks and “curtailed their incentive to grant funding requests by small businesses,” said Rohit Arora, CEO of Biz2Credit. “Once it becomes more profitable to lend money, the spigots will open.”
High vs. Low: The Interest Rate Debate
Further, the expectation of higher U.S. interest rates is a factor in the rising value of the dollar, which has appreciated about 20 percent in the last year.
“As a result of the strong dollar, every import that American companies use for their products — be it autos, computers or mobile phones — is vastly cheaper,” economist Larry Kudlow of CNBC pointed out. That makes American businesses more competitive and contributes to significantly-increased buying power of consumer incomes.