US’ irresponsible policies exacerbate global economic woes
The US Federal Reserve is widely expected to raise interest rates by 0.75 percentage points at its policy meeting later this week, even though its tightening of monetary policy could further aggravate a global debt crisis and trigger competitive currency devaluation, with developing countries bearing the brunt.
Since March, the Fed has already increased interest rates three times, and in its latest move in June, the Fed approved a 0.75- percentage- point rate rise, the largest interest rate increase since 1994. Before its Federal Open Market Committee meeting on Tuesday and Wednesday, more and more economists are predicting that the Fed will approve another significant 75 basis- point hike to tame runaway inflation.
If the Fed adopts another sharp interest rate hike later this week, the move will inevitably pile onto the multiple crisis and growing challenges already facing developing countries. First, when the Fed raises the federal funds rate, it typically increases interest rates throughout the US economy, which tends to make the dollar stronger. A strengthening dollar means it can buy more of a foreign currency than before and therefore devalues other currencies. Economies across Asia, already weakened by factors such as the pandemic, is currently facing yet another blow with the “competitive devaluation” of many Asian currencies.
For instance, the India rupee has touched a record low and breached a key psychological mark of 80. The Philippine peso hit a near 17- year trough in June, with some other Asian emerging market currencies weakening further. The Fed’s possible rate hike at its upcoming July meeting will likely further deteriorate the already sharp depreciation of Asian currencies against the strong US dollar.
Second, further interest rate hikes in the US will inevitably affect capital flows and cause changes in asset prices in emerging economies in Asia, with investors selling depreciated Asian currencies and buying dollar- denominated assets to earn high returns from holding the greenback. The volatility of capital flows to emerging markets will pose challenges to the Asian economy going forward.
Third, higher US interest rates could make it more expensive for developing countries to meet their dollar- denominated debt obligations. Borrowing was already surging before the pandemic, but the COVID- 19 and now the global energy crisis have pushed global debt to new highs. Many believe global debt is currently at dangerously high levels and countries like Sri Lanka have been struggling under the weight heavy debts.
Some reports said that when the US sneezes, the world could catch a cold. The question remaining now is can the world afford a further Fed rate hike, a stronger greenback, accelerated capital outflow, and higher borrowing costs for emerging countries. The risk of a global financial crisis has risen, as the Fed is well on its way to another sharp interest rate hike.
With US inflation raging at a four- decade high, the Fed is under pressure to raise interest rates aggressively, but the Fed has given too little consideration to the negative impact of its rate hike on the global economy when it sets the tone for its monetary policy.
Some economists believe raising interest rates to tame demand and therefore inflation is not a fundamental solution as high prices have been mainly driven by factors such as global energy woes and US unilateral sanctions. If the Fed increasingly errs on the side of over hawkish in its approach for the remainder of 2022 and 2023, more emerging markets will suffer miserably from financial turmoil. The world needs to remain vigilant. This irresponsible monetary policy will inevitably affect the US economy and the hegemony of the US dollar in the long run.