NEW YORK (TheStreet) -- The question of whether the Fed will increase interest rates or not continues to worry consumers, businesses and markets across the world. The IMF warned the world's biggest economies that it might be too early to raise interest rates, as risks to global growth persist. But on September 16 and 17, policymakers at Federal Open Market Committee may decide to boost short-term interest rates -- and if that happens, even a minute change can get mixed reactions.
With that in mind, here is the good news, bad news and just plain ugly news that would come out of an interest rate hike.
1. Borrowers -- Ugly
If interest rates are increased, borrowers with variable interest rates will be adversely affected. Housing loans will get expensive for borrowers and interest payments on credit cards will also increase. Borrowers seeking student loans will feel the negative effect of the interest rate hike but those who already have student loans will remain unaffected, as the interest rates remains fixed for student loans. Firms that rely heavily on debt could also feel the pressure, due to an increase in borrowing costs.2. Consumers, Senior Citizens and Savers -- Good
Since 2007, savers could not earn much on their deposits with the banks. With an interest hike, banks will pay more to customers and this is good news for retirees who earn a substantial portion of their income from interest on their savings. An interest rate rise will also make foreign goods more affordable. However, the downside of a strong dollarcan have adverse effects in the long run as American goods become more expensive and may in turn affect trade.
3. Emerging Markets -- Bad
As emerging markets struggle amidst market panics, an increase in the Fed funds rate could be damaging for developing economies. Trade, currency and employment levels of developing nations may in turn get affected, as money flows towards the U.S. The World Bank's Chief Economist Kaushik Basu even cautioned that any hike in interest rates could lead to "panic and turmoil" in emerging markets and that the Fed should wait until the global economy stabilizes.
According to Daniel Tenegauzer, head of emerging market and global foreign-exchange strategy at Royal Bank of Canada's (RY) RBC Capital Markets, "The Fed hikes, the dollar appreciates." The stronger dollar will encourage global investors to invest in the U.S. than in emerging markets. If a strong dollar persists for long, then dollar-denominated debts owed by emerging markets may get severely impacted. Brazil, Turkey, Indonesia, Russia and South Africa may face tough economic conditions in the second half of 2015 due to high borrowing costs.
BIS had warned in June that "massive borrowing" by emerging markets have left the countries vulnerable to funding reversals. Due to a strong dollar, developing countries may force the emerging markets to slow down even further, impacting their economic strength, as they will find it harder to repay their dollar-denominated debts.
David Hauner, managing director of Bank of America's (BAC) Bank of America Merrill Lynch said in The Financial Times that the emerging countries like Brazil, Russia and South Africa could be "worst off" as they are commodity exporters and will "get caught between the strong dollar and a weak China."