Friday, July 1 2022

Strong points

  • Kristalina Georgieva, Managing Director of the IMF, recently said interest rate hikes by the Fed could impact the global recovery.
  • She worried that rising interest rates in the United States would make repayment more costly for economies with dollar-denominated debt.
  • Then followed a hawkish statement from the Fed that members of the US central bank were considering an interest rate hike in March.

Days before U.S. Federal Reserve policymakers announced they would raise interest rates in March, Kristalina Georgieva, managing director of the International Monetary Fund (IMF), had expressed concern that interest rate hikes interest rates by the Fed could “throw cold water” on an already gloomy economic environment. repeated in some countries.

Georgieva also stressed the need for the Fed to lucidly communicate its monetary policy plans before surprising the world. She worried that rising interest rates in the United States would make repayment more costly for economies with dollar-denominated debt.

Then followed a hawkish statement from Fed Chairman Jerome Powell that members of the US central bank were considering an interest rate hike at their March 15-16 meeting. The Fed’s hawkish tone soon sparked a strong sell-off in global equities and sent Treasury yields skyrocketing as well.

Potential Impact of Fed Rate Hikes on Emerging Markets

Emerging economies generally have higher interest rates than developed economies such as the United States due to higher inflation. Thus, foreign portfolio investors (REITs) borrow money cheaply in dollars in the United States and invest the same funds in the debt of fundamentally sound emerging countries to obtain a higher interest rate. On that note, the impending rate hike in the US could impact primarily these three lines:

  • With an increase in interest rates in the United States, the spread between the rates of the two countries could narrow. This would make the debt of a particular developing economy less important to a foreign exchange investor.
  • The interest rate hike signaled by the Fed points to a less growth-oriented future in the United States. This could be a drag on global economies as China struggles to deal with the real estate crisis.
  • Emerging markets could also see a strong sell-off in equities amid higher US debt yields. This could dampen the enthusiasm of REITs. Currency markets could see a rapid outflow of funds.

Global debt hit $226 trillion in 2020, the biggest one-year rise since World War II, according to a December 2021 IMF statement.

Meanwhile, Georgieva also said that the whole issue is country-specific, which made 2022 even tougher than the year before.

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