The U.S. Federal Reserve has decided to keep the federal funds rate steady at 5.25 to 5.50 percent, maintaining a 23-year high interest rate nearly a year after the initial rate hikes aimed at combating inflation. Federal Reserve Chairman Jerome Powell explained that the decision is based on the lack of strong evidence that inflation is steadily moving towards the 2-percent target.
The Federal Open Market Committee (FOMC) indicated the possibility of only one rate cut for the remainder of the year, a significant reduction from the three rate cuts projected earlier. This conservative approach is supported by the robust U.S. economy, particularly its tight labor market, allowing the Fed to delay rate reductions. However, the outlook for 2025 might include up to four rate cuts, contingent on consistent economic trends that could lead to a "soft landing" for the U.S. economy.
While the U.S. economy shows resilience, the global economy, especially emerging markets and developing economies (EMDEs), faces significant challenges. The U.S. dollar, as the world's reserve currency, has seen two-thirds of approximately 150 currencies weaken against it. This depreciation reduces the purchasing power of these economies, making imports more expensive and negatively impacting output and quality of life.
The Fed's hawkish stance has also led to massive capital inflows to the U.S., draining liquidity from other countries. According to the Bank of International Settlements (BIS), foreign currency credit in U.S. dollars to non-banks overseas decreased by $87 billion in the fourth quarter of 2023. This liquidity drain, coupled with higher U.S. interest rates, pressures EMDEs to raise bond yields to attract investors, increasing their debt burdens and constraining fiscal space.
Furthermore, U.S. dollar-denominated liabilities have been rising globally, making debt more unsustainable for countries like Brazil, Turkey, and South Africa, which run persistent trade deficits. The high interest rates increase the cost of servicing this debt, posing a threat to economic recovery and debt sustainability worldwide.
In summary, while the Fed's decision to maintain high interest rates may be theoretically sound for the U.S., it presents significant challenges for the global economy, potentially hindering economic recovery and exacerbating debt issues in emerging markets.
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The Fed's high interest rate decision constrains global economy
cgtn.com
