Fed’s Continued Interest Rate Hikes Pose Global Economic Risks
Xinhua News Agency, Washington – The US Federal Reserve’s decision to raise interest rates by 25 basis points on July 26th has pushed the interest rate to its highest level in 22 years. This move, marking the 11th rate hike since March 2022, has prompted concerns among experts about its implications on both the US and global economy.
Experts argue that the ongoing rate hikes have contributed to a slowdown in US economic growth. Furthermore, it has increased pressure on the financial system and worsened the already heavy debt burden, bringing about negative spillover effects for the global economy. The substantial interest rate hike by the Federal Reserve has driven up debt repayment costs for emerging markets and developing economies. This has subsequently intensified their capital outflow risks, leading to turbulence in the global financial market and an increased risk of economic downturn.
The recent acquisition of Pacific Western Bank by the smaller Bank of California highlights the impact of the Federal Reserve’s aggressive interest rate hikes on the banking industry. Desmond Rahman, an economist at the American Enterprise Institute, predicts that other regional bank failures may follow. The chain reaction of bank failures and pressure on the financial system could result in credit tightening and further slowdown of the global economy.
The aggressive interest rate hikes by the Fed have caused a rise in US Treasury yields and a stronger US dollar. This has prompted a large-scale flow of international capital from emerging markets to the US in search of higher returns. As a result, financial markets in many countries have been greatly affected. In order to avoid currency fluctuations, capital outflows, and imported inflation, these countries are forced to raise their own interest rates, which in turn poses risks to their own economic growth.
The capital outflows from emerging markets due to the US interest rate hikes have led to a sharp depreciation of their currencies. Higher interest rates have also increased debt repayment costs and elevated debt risks for severely indebted emerging market economies. Low-income countries are particularly vulnerable, with many already struggling with debt distress.
Mohammad Lardy, a professor of economics at Cairo University in Egypt, states that the Fed’s rate hike will exacerbate the uncertainty and instability faced by emerging market economies, which have already been significantly impacted by events such as the Ukraine crisis.
The International Monetary Fund (IMF) has also pointed out the weak global economic growth and the pressure imposed by many central banks to curb inflation. The IMF highlights multiple risks to global economic growth, including persistent inflation, re-pricing of financial markets, and increasing debt pressure in emerging markets and developing economies.
For businesses, the continuous rise in interest rates forces many enterprises to refinance in a high-interest-rate environment. This, in turn, may trigger a wave of global corporate debt defaults. A survey conducted by the World Economic Forum reveals that rising interest rates have reduced demand and increased borrowing costs, making debt pressure a significant concern for organizations. Approximately a quarter of respondents believe that debt problems will have a severe impact on their organization within this year.
Moody’s Investors Service estimates that the global risky debt default rate will reach its peak at 5.1% early next year. Under a pessimistic scenario, the default rate on high-risk debt could escalate to 13.7% within a year, surpassing the peak during the 2008 international financial crisis.
The continued interest rate hikes by the Federal Reserve not only affect the US economy but also pose significant risks to the global economy. As countries and businesses grapple with potential consequences and challenges, it remains to be seen how various economies will weather this latest development.