The most likely short term impact is that the European
sovereign debt crisis will cause the Federal Reserve to refrain from raising interest
rates. The bloomberg.com link below says that the President of the Federal Reserve Bank
of Chicago has indicated that
readability="6">the European sovereign debt crisis will prompt
the U.S. central bank to delay raising interest
rates.The reason for this is
that the crisis is likely to depress economic activity worldwide. It does this because
it decreases Europe's buying power thus making Europe conduct less business with the
rest of the world.When an economy faces a situation where
economic activity is likely to decline, its central bank should not raise interest
rates. Raising interest rates makes it harder to borrow money. When less money is
borrowed, fewer goods and services are bought. Raising interest is something a central
bank should do when there is a threat of inflation, not when there is a threat of
recession as there is now because of the European sovereign debt
crisis.
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