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How far will the U.S. Federal Reserve Board go with its continued rapid interest rate hikes? It is hoped that the Fed will manage its policy with due consideration for the impact on the economies of other countries as well as the domestic economy of the United States.
The Fed has decided to raise its key interest rate by 0.75 percentage points to reach a target federal funds rate in a range between 3.75% and 4%. This is the fourth consecutive 0.75-point interest rate increase — each of them three times greater than the previously ordinary increment — following ones in June, July and September. The key interest rate has risen to its highest level since 2008.
In the United States, historic price increases are hurting the lives of low-income earners and other people. It is understandable that the central bank has continued to tighten monetary policy, placing top priority on curbing inflation.
The problem is the future pace of interest rate hikes. This time, the focus was on the Fed’s explanation about the outlook for December and beyond.
Fed Chair Jerome Powell said at a news conference that the interest rate hikes would continue, but hinted at the possibility of smaller hikes ahead.
Monetary policy moves are said to take more than six months to show effects on the economy and prices. Powell said the Fed would slow down the pace at some point to see the effects of rapid interest rate hikes.
On the other hand, regarding the Fed’s projection in September that the key interest rate would reach 4.6% in 2023, Powell suggested that “the ultimate level of interest rates will be higher than previously expected.” That means that interest rate hikes will be prolonged.
U.S. stocks fell sharply at one point as the market perceived this as Powell emphasizing the central bank’s monetary tightening stance.
The impact of U.S. monetary policy on the global economy is enormous.
If the United States accelerates its interest rate hikes, it will become more advantageous to manage assets in dollars. This leads to a situation that can be called “the sole appreciation of the dollar” against the currencies of many other countries. Other countries are being forced to raise interest rates to deter inflation, mainly due to the depreciation of their currencies.
Emerging economies and developing countries could face a currency crisis due to an acceleration of capital outflows. There is also a risk that ballooning dollar-denominated debt could disrupt their fiscal management.
The U.N. Conference on Trade and Development (UNCTAD), which provides assistance to developing countries, called on the Fed to correct its course, saying that the excessive monetary tightening policy would cause anxiety, especially in economies of developing countries.
It is important for the Fed to listen to such opinions as well.
Mortgage rates have soared in the United States, prompting people to hold off on purchasing homes. Consumer spending is also on the decline. If the U.S. economy stalls, the global economy will suffer a major blow.
Continued U.S. interest rate hikes will further widen the interest rate gap with Japan, thereby maintaining a situation in which the yen’s weakening will be accelerated easily. The Japanese government and the Bank of Japan should remain vigilant against excessive currency fluctuations.
