Ten times in a row! The Fed's aggressive interest rate hike impacts the global worldview

China News Network, May 5 (Zhang Naiyue Sweet) A few days ago, Federal Reserve officials approved a 9 basis point interest rate hike to a 25-year high, marking the central bank's tenth interest rate hike in more than a year, with a cumulative rate hike of 16 basis points.

Soaring loan interest rates, bank failures one after another, layoffs in many industries, falling world markets... The Fed's continued aggressive interest rate hikes not only increase the risk of recession in the country, but also have negative spillover effects around the world.

Infographic: Federal Reserve Chairman Jerome Powell. Photo by China News Agency reporter Sha Hanting

Caught in a dilemma, the United States may be heading for recession?

"This round of rate hikes is the Fed's fastest pace since the 20s of the 80th century." The Wall Street Journal notes that this rate affects other interest rates throughout the U.S. economy, such as those on mortgages, credit cards, and business loans.

After the latest monetary policy meeting, Fed Chairman Jerome Powell did not rule out the possibility of continuing to raise interest rates. After successive interest rate hikes, the Fed is now facing a dilemma.

On the one hand, Powell said that although the current inflation level in the United States has eased, inflationary pressures remain high and "there is still a long way to go" from the long-term target of 2%. Multiple officials told CNBC that rates may need to remain high even if rate hikes are paused.

On the other hand, the impact of continued interest rate hikes and high interest rates on the economy is gradually emerging. The US "Fortune" magazine pointed out that the Fed's interest rate hike will increase the debt burden of consumers and enterprises. Since the rate hike began in March 2022, interest rates on credit cards, mortgages and auto loans have been soaring, raising the risk of recession.

Bloomberg noted that along with the rate hike, the U.S. construction industry weakened, and other industries such as technology and finance saw layoffs. CNBC also noted that U.S. gross domestic product (GDP) grew at an annualized rate of 1.1 percent in the first quarter, down from the 2 percent forecast by economists and significantly lower than the 2022.2 percent forecast in the fourth quarter of 6.

In addition, interest rate hikes to curb inflation have also brought a crisis to the US banking sector. U.S. Treasury Secretary Janet Yellen admitted in March that the main reason for the collapse of Silicon Valley Bank was the Federal Reserve's continued interest rate hikes, which led to a decline in the market price of financial assets such as bonds held by the bank. So far, several banks in the United States have failed.

Heather Boushey, a senior economist at the White House, told Reuters that the Fed's interest rate hikes to curb inflation had a negative impact on the banking sector.

The New York Times pointed out in the report that economists have begun to predict that such policies by the Federal Reserve, combined with turmoil in the banking sector, will stifle economic growth, and the United States may fall into recession later in 2023.

CNBC has previously commented that for most of the past year, investors doubted that the Fed could achieve a so-called "soft landing" — guiding inflation down without triggering a recession. It's been a year since the Fed started raising interest rates, but the future is still unclear.

Data map: On March 2023, 3, local time, customers lined up in front of the headquarters of Silicon Valley Bank in Santa Clara, California, USA.

The impact is widespread, and ten rate hikes hurt the world

Arab News Network pointed out that after the Fed announced another interest rate hike on May 5, the pan-European Stoxx 3 banking index and London's FTSE 600 index fell on the 100th, and after Fed Chairman Powell still expressed concern about inflation, it triggered a broader subdued market sentiment.

The consequences of the Fed's interest rate hike are transmitted to the Gulf region. According to Reuters, affected by the Fed's interest rate hike and other factors, most major stock markets in the Gulf region have been sluggish in early trading in recent days, following the global stock market lower.

Most GCC countries, including Saudi Arabia and Qatar, have currencies pegged to the US dollar, and the Fed's interest rate hikes have left the region exposed to the direct impact of monetary tightening in the world's largest economies.

In Europe, expectations of a recession in the United States have also had a negative impact. Eurozone GDP grew by only 2023.0% month-on-month in the first quarter of 1, with the economy of Germany, the eurozone's largest economy, stagnating from January to March, according to recent data from Eurostat.

Carsten Brzeski, head of macro research at ING, said that the ECB's monetary tightening policy and the risk of recession in the United States will continue to wrestle with the positive momentum of industrial and wage growth, affecting the European economic trend.

CNBC quoted economists at Deutsche Bank as saying that Germany avoided a technical recession by "millicentimeters" and that the country's economic growth rate in 2023 is expected to be zero, as high inflation, rising interest rates and the expected recession in the second half of 2023 have dragged down the economy.

The US banking crisis has also spread to Europe. After the collapse of Silicon Valley banks, European bank stocks fell. Germany's Federal Financial Supervisory Authority halted the German branch of Silicon Valley Bank, but it still failed to allay the panic among European investors.

In addition, the World Bank noted in its analysis that U.S. rate hikes since 2022 have been largely driven by a "reaction shock" triggered by investors' expectations of the Fed's shift to a more hawkish monetary policy stance, which could have particularly harmful financial and economic implications for emerging market and developing economies (EMDEs).

The BBC mentioned in its analysis that after the Fed raises interest rates, it means that the US dollar has higher interest returns and financial asset returns, which will lead to international funds from emerging markets flowing into the US market, making the national currency face depreciation pressure. (End)