Cairo – Omar Hassan: The US Federal Reserve left the door open to expectations regarding the fate of the interest rate during its next meeting in September, after its recent decision last July to raise interest rates by 25 basis points.
The Fed mortgaged the fate of interest with the following economic data, on the basis of which it determines its decision within its plan aimed at dropping the inflation rate to 2 percent.
But what about the repercussions of persistently raising interest rates for the economies of heavily indebted developing countries? Will the Fed keep this in mind when raising interest rates, especially in light of global fears of recession?
interest rate risk
The Fed’s decision to raise interest rates always casts a shadow over many emerging economies, especially as it prompts many central banks around the world to move to raise similar interest rates.
This threatens to increase debt burdens on developing countries and raise unemployment rates, in addition to the decline in the purchasing power of local currencies, in addition to the exit of the so-called “hot money”, which is financial flows from outside the country for the purpose of investing and benefiting from a specific economic situation.
Essentially, the goal of successive interest rate increases in Washington is to make credit more expensive to slow consumption and investment and ultimately relieve pressure on prices.
Any new increase in interest rates will make borrowing money more expensive for many countries and institutions, and it may also attract money towards the United States from countries with lower interest rates, besides it can make the US dollar more valuable, and this can cause a decline in investment and spending in the United States.
recession fears
Economists fear that the Fed will lead the world economy into recession because of its insistence on bringing the inflation rate to 2 percent.
This comes after reports of slowing real estate market sales, lower consumer confidence, and higher jobless claims.
Federal Reserve Chairman Jerome Powell has acknowledged that sectors of the economy are slowing, but said the Fed is likely to continue raising interest rates in the coming months despite the risks.
Although the unemployment rate seems to be low in the United States, but with the increase in the interest rate, many people may lose their jobs and many companies may lose their investments, especially those who work in real estate and other sensitive markets are already threatened to lose a lot of jobs.
According to economists, this large interest rate hike could lead to a deeper recession, and when the United States enters a recession, its trading and investment partners can also see a drop in demand.
emerging economies
It is possible that the US move to raise interest rates will affect emerging economies, which are not isolated from the totality of events taking place in the global arena.
On top of this comes undermining the attractiveness of domestic debt instruments, as the decision of major central banks to raise interest rates represents a risk for emerging markets due to the possibility of undermining the attractiveness of domestic debt instruments offered by countries, as investors rush to advanced economies with the start of raising interest rates, which leads to an exodus of investments. foreigners from emerging markets.
The repercussions also include the increasing possibility of interest rate hikes in the rest of the world’s economies, as many countries often decide to raise interest rates accordingly after the US Federal Reserve takes that step.
It is also possible that raising the global interest rate will have a negative impact on the internal borrowing of governments in order to bridge the budget deficit, which will lead to an increase in the burden of internal debt as a result of the high cost of government borrowing, as well as limiting industrial, investment and corporate expansions as a result of raising the interest rate on borrowing.
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