The Federal Reserve is currently considering raising interest rates for the first time in a decade, a move that is reverberating throughout the global economy. This consideration comes despite America experiencing its longest private sector hiring spurt on record and unemployment having halved since its peak. The Fed believes a hot jobs market could lead to a pickup in inflation and wages, prompting them to consider increasing borrowing costs to maintain economic stability.
However, the Fed faces a tough decision, with varying opinions on the timing and impact of a rate hike. Optimists suggest a quarter-point increase would be negligible and a sensible step to stay ahead of inflation. Sceptics, on the other hand, warn that inflation remains low and an early hike risks roiling world markets and strengthening the dollar. Fed officials themselves project that rate rises, when they begin, will be gradual, at less than half the tempo of the last round that started in 2004, and will likely stop at a very low ultimate rate, not much more than 3 per cent.
The global economic landscape, particularly the situation in China, adds complexity to the Fed's decision. Emerging markets account for a significant portion of global GDP, and a US monetary policy that weakens these markets risks depressing global demand, thereby impacting US growth. Specifically, a Fed rate hike could make US dollar assets more attractive, accelerating capital outflows from China and reducing Beijing's resources to invest in US Treasury debt. This could also affect corporations that have taken advantage of the low-rate environment to borrow money, with some economists fearing higher interest payments for companies with low-grade debt.
