The US Central Bank, unless surprised, will raise interest rates on Wednesday, the second hike in less than two months, with a view to pushing inflation back to its 40-year high. The effects of his policies were felt throughout the global economy.
In the United States, the challenge is to dampen price pressures without sending the world’s largest economy into recession. A delicate exercise now that the US economy has already slowed considerably. GDP even shrank by 1.4% in the first quarter.
Wednesday’s hike is expected to be half a percentage point, the first since May 2000, which should see interest rates rise between 0.75% and 1%.
In March, the Fed signaled the possibility of six more hikes by the end of the year.
A majority of economists are now forecasting an even more aggressive increase of three-quarters of a percentage point at the June meeting, which would be a first since 1994.
They are counting on Fed Chair Jerome Powell to advise on the size of the next hikes during his press conference on Wednesday.
What impact on the markets?
Higher interest rates can have a negative effect on the stock market.
With higher borrowing costs, companies could invest less. If their costs are higher and their business is less thriving, a drop in revenues and profits can affect the value of their stocks.
We also cannot rule out a psychological aspect of how investors perceive market conditions. Traders could resort to more defensive investments without waiting for the long process of rate hikes to be felt across the economy.
What impact on the debt burden of poor and emerging countries?
Emerging and developing economies that take out dollar-denominated loans run the risk of being overwhelmed by the cost of credit.
The International Monetary Fund (IMF) and the World Bank have been warning for months about the risks for these countries of a too rapid interest rate hike by the Fed.
They were already heavily indebted before the pandemic, but have built up even more debt during the health crisis, to the point that 60% of low-income countries are already over-indebted or approaching it.
What effect on capital flows?
When interest rates rise in the United States or other advanced economies, investors withdraw money from emerging markets they’d flocked to in search of more profitable returns.
In 2013, even before the rate hike, investors had anticipated a decline in the Fed’s liquidity injections, which sent Brazilian, Turkish and Indian currencies down.
If the Fed confirms the change of course at other meetings this year, it would put pressure on emerging economies in need of money and could weaken some currencies as a result. The central banks of these countries may respond with higher interest rates, but this would put more pressure on economic activity.
What about the US real estate market?
In the United States, the Federal Reserve’s policy rate mainly affects the cost of mortgages and consumer loans.
In March 2020, the Fed had cut the key rate to a range between 0% and 0.25%. This stimulated the real estate market.
But the surge in sales coupled with a limited supply of real estate has also been accompanied by a sharp rise in house prices as builders struggle to complete their programs due to global supply difficulties and labor shortages.
But even before the first increase in March (+0.25 percentage point), mortgage applications slowed and home sales fell in March.
Did you find an error?Let us know.