The Federal Reserve's continued interest rate hikes exacerbate global economic risks in the market | risk | economy
Washington, July 27th (Xinhua) - The Federal Reserve's continued interest rate hikes exacerbate global economic risks
Xinhua News Agency reporter Xiong Maoling and Shi Chun
The Federal Reserve announced on the 26th that it will raise the federal funds rate target range by 25 basis points to between 5.25% and 5.5%, pushing interest rates to their highest level in 22 years. This is the 11th rate hike by the Federal Reserve since entering the current rate hike cycle in March 2022, with a cumulative increase of 525 basis points.
Experts point out that continuous interest rate hikes have led to a slowdown in US economic growth and increased pressure on the financial system, further exacerbating the already heavy debt burden, which will bring negative spillover effects to the global economy. In addition, the significant interest rate hike by the Federal Reserve has also pushed up the debt service costs of emerging markets and developing economies, exacerbating their capital outflow risks, and leading to global financial market turbulence and increased economic downturn risks.
Just the day before the Federal Reserve announced its interest rate hike, Pacific Western Bank, which had previously experienced a sharp drop in stock prices due to deposit outflows, announced that it would be acquired by the smaller California bank. This is another example of the banking industry's volatility caused by the Federal Reserve's aggressive interest rate hikes, following the closure of Silicon Valley Bank and Signature Bank in March and the closure of First Republic Bank in early May.
Economist Desmond Rahman from the American Enterprise Research Institute told Xinhua News Agency that he believes he will also see a large number of other regional banks go bankrupt. The Wall Street Journal previously reported that the chain reaction of US bank failures and increased financial system pressure may lead to a tightening of credit, and the global economy may further slow down as a result.
This round of radical interest rate increase by the Federal Reserve has raised the yield of US treasury bond bonds and strengthened the US dollar, prompting international capital to flow from emerging markets to the United States on a large scale in pursuit of higher returns, which has severely impacted the financial markets of many countries. To avoid significant fluctuations in domestic currency exchange rates, capital outflows, and intensified imported inflation, these countries have to follow suit with interest rate hikes, posing risks to their own economic growth.
Rahman stated that the US interest rate hike has led to a significant outflow of capital from emerging markets, resulting in a significant depreciation of emerging market currencies. Higher interest rates have increased the cost of debt servicing for emerging markets, pushing up the debt risk of highly indebted emerging market economies, and many low-income countries have fallen into debt difficulties.
Mohammad Radi, an economics professor at Cairo University in Egypt, said, "For emerging market economies that have suffered significant economic impacts due to the Ukraine crisis, the Fed's interest rate hike will increase uncertainty and instability in their economic prospects."
The International Monetary Fund released an updated World Economic Outlook report on the 25th, stating that global economic growth remains weak, and measures taken by central banks to curb inflation and raise policy interest rates continue to put pressure on economic activity. At present, there are still multiple downward risks to global economic growth, including sustained inflation, repricing of financial markets, and increased debt pressure on emerging markets and developing economies.
For enterprises, the continuous rise in interest rates is forcing more and more companies to refinance in a high interest rate environment, which may trigger a global wave of corporate debt defaults. A survey conducted by the World Economic Forum on corporate chief risk officers recently showed that rising interest rates have reduced demand, pushed up borrowing costs, and made increasing debt pressure or default a very real concern. Nearly a quarter of respondents stated that this year's debt problem is highly likely to have a "serious impact" on their organization.
Moody's Investor Services estimates that the global default rate for risky debt will peak at 5.1% early next year. The company believes that in a "severely pessimistic" situation, the default rate of high-risk debt may jump to 13.7% within a year, higher than the peak of 13.4% during the 2008 international financial crisis.
