After the IMF, also China has asked the US not to raise their interest rates. For good reasons, writes financial analyst Sara Hsu in the Diplomat. Step from the US had disastrous effects on the global economy in the past.
The impact of changes in U.S. monetary policy on international growth is well documented. Research has underscored the fact that an increase in U.S. real interest rates results in a decline in economic activity in emerging markets. Interest rate increases are transmitted across Asia, Latin America, Europe, and Oceania. The ways in which interest rate hikes are transmitted differs, and this may occur through pass-through to domestic interest rates, through the carry trade, and through exchange rates. The changes may occur as a result of interest rate differentials between the U.S. and other countries, making the U.S. look more attractive to investors, and/or as a result of an increased climate of risk. The transmission processes are myriad and complex, but the bottom line is that rising interest rates in the U.S. adversely affect growth in emerging markets, and this is a big concern right now since China’s growth appears unstable.
Despite the warnings about negative impacts on emerging markets, especially China, it is highly likely that the U.S. will raise interest rates this year, given impending inflation and the threat of speculation in the face of excessively loose monetary policy. One of the most important duties of the Federal Reserve Chairperson is to set expectations regarding monetary policy to reduce uncertainty in financial and real markets. Federal Reserve Chairwoman Janet Yellen has made the case for raising short-term interest rates this year repeatedly; she is unlikely to abandon this path.
What this means for China and other regions of flagging growth is that they must account for this expected interest rate increase in the U.S. in all of their economic policy measures. Leaders should guard against capital flight, help to reduce or ensure interest payments for dollar-denominated loans, and consider implementing innovative monetary policy measures themselves. While warning against the U.S. interest rate hike signals concern over wobbly global growth, it is unlikely to change Federal Reserve policy and likely to raise anxiety among emerging markets. Hence these warnings may have unintended consequences of unnerving markets and dampening economic activity. One can only hope that sufficient strides will be taken to counter this malaise.
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