Macro Effects of a Us Interest Rate Increase on France

In this document, I will describe the main macro effects of an increase in the base rate of interest in the US on France national economy.

Macro effects of a US interest rate increase on France

Interest rates are the prices to pay by a borrower to a payer in order to buy an amount of money. It then takes into account the sum of borrowed money, the duration of the loan, and the incurred risk. Interest rates in short run are fixed by monetary markets. Actually they are negative for 6 countries, -0.05%, meaning that some loaners prefer lending money to "secured" countries, loosing some money, rather than to other countries non financially safe. For the mid and long term interest rates, negotiations occur in the bond market (France is borrowing at a rate of 2.4% for a ten year period).

For the US, this is the Federal Reserve (FED) who decides the monetary policy with the objective of stability in both the prices and the employment rate. Also it controls the US dollar value using repo rate to motivate investments or evasion of capital thus influencing USA growth.

In 2008, FED has decreased its repo rate to 2,25% (because of financial markets panic and recession risk). The 16th of December (2008), the rate was set to 0%, causing a gold rush. To block recession effect, FED acquires in March 2009 300 billions USD of bonds and 750 billions of MBS (Montage Back Security). In March 2011, FED has announced a profit of 82 billions USD (record) mainly thanks to assets bought from Bank in bankruptcy.

Economics' performances mainly depend on its capacity to produce growth and maintaining inflation rate as low as possible. To facilitate the growth and accelerate growth rhythm in its productivity, governments try to stimulate investments therefore low interest rates. As a consequence, organisational politic must be adapted.

In France, ECB (European Central Bank) is in charge of defining interest rates. In the US, FED that ensures the same role, has a monetary policy very reactive (rates are adjusted more frequently than counterparts) and with "low rates" flirting with 0%. It has contributed, and still contributes to:

• modify saving attitudes from households and investors,

• stimulate credits and economy activity,

But it is clear that this low rate policy is not enough to strongly reflate the economy.

Then, which impacts on France does an increase of US interest rates have?

First of all, interest rates are economic factors aiming at minimizing inflation and facilitation growth simulation. If rates rise, banks liquidity demand will be limited and thus there will be less inflation. If