Xinhua News Agency, Washington, March 16 (Reporter Xu Yuan and Gao Pan) The U.S. Federal Reserve announced an interest rate hike on the 16th, raising the target range of the federal funds rate by 25 basis points to between 0.25% and 0.5%. Analysts believe that in the context of high inflation and high uncertainty in the geopolitical environment, there are challenges in the Fed's choice of the path to raise interest rates in the future. At the same time, the Federal Reserve's interest rate hikes may lead to an increase in the risk of global debt defaults.
Video footage taken on March 16, 2022 shows that interim Federal Reserve Chairman Powell attended an online press conference in Washington. (Photo by Xinhua News Agency reporter Liu Jie)
There are doubts about the intensity of future interest rate hikes
Taking into account the high inflation environment and the uncertainty of economic growth prospects, there are differences within the Federal Reserve on the path to raise interest rates in the future. On the one hand, the inflation situation in the United States is not optimistic. The Russia-Ukraine conflict and subsequent sanctions have caused global commodity prices to surge, which may continue to push up U.S. inflation in the coming months.
Lawrence Summers, a professor at Harvard University, wrote in the Washington Post on the 15th that the United States is facing huge inflationary pressures, including rising energy prices, rising food prices caused by the Russia-Ukraine conflict, and intensifying supply chain disruptions caused by the rebound of the new crown epidemic. Etc., the above factors may push the U.S. inflation rate up by 3 percentage points within the year.
On December 7, 2021, people bought food at a market in New York, USA. (Photo by Xinhua News Agency reporter Wang Ying)
The latest economic outlook released by the Federal Reserve on the 16th shows that the U.S. inflation rate is expected to rise to 4.3% this year, and the core inflation rate after excluding food and energy prices is 4.1%, both higher than previously expected and well above the 2% inflation target.
Fed interim Chairman Powell recently attended a congressional hearing and stated that if inflation levels remain high, the Fed will be "prepared to take more aggressive action" and continue to raise the federal funds rate.
On the other hand, the conflict between Russia and Ukraine has exacerbated global supply imbalances and affected the U.S. economic recovery. Federal Reserve officials have a more pessimistic view of the U.S. economic outlook, predicting that the U.S. economic growth will be 2.8% in 2022, a decrease of 1.2 percentage points from the December forecast last year.
The upward revision of inflation expectations and the downward revision of economic growth expectations have increased the risk of the Federal Reserve withdrawing its easing policy, and there are disagreements within the Federal Reserve on the intensity of future interest rate hikes. According to the economic outlook, 18 members of the Federal Open Market Committee of the Federal Reserve unanimously believe that the federal funds rate is expected to rise to above 1.25% this year. However, there are obvious differences in opinions regarding the upper limit of interest rate increases. Some even believe that the interest rate level will rise to 3% this year. A high of 3.25%.
Global debt default risk increases
Analysts believe that the Fed's interest rate hikes may not only exacerbate U.S. debt risks, but may also increase the cost of repaying U.S. dollar debt for emerging markets and developing economies, thus pushing up global debt default risks.
Data released by the U.S. Treasury Department recently showed that the U.S. federal government debt has exceeded 30 trillion U.S. dollars, which is about 7 trillion U.S. dollars higher than the U.S. gross domestic product (GDP) last year. As the world's largest debtor nation, the United States' debt has accelerated in recent years, growing by nearly $7 trillion since the outbreak of the COVID-19 pandemic.
At the same time, U.S. corporate debt is at high levels and is less resistant to monetary tightening. According to data from the Securities Industry and Financial Markets Association, as of the end of September 2021, the balance of corporate bond issuance by U.S. companies reached US$10 trillion, which was about 30% more than the end of 2015 at the beginning of the last interest rate hike cycle. Among them, low-rated bonds with higher debt default risks account for about 20%.
Not only that, the Fed's interest rate hikes may intensify the risk of debt crises around the world, especially in emerging markets and developing economies. The debt scale of these economies has expanded sharply since the outbreak of the new coronavirus.
Data released by the World Bank shows that since 1970, the world has experienced four stages of debt accumulation, involving more than 100 economies, triggering financial crises in many emerging markets and developing economies. Among them, the most recent debt accumulation began in 2010 and is the most serious and continues to this day.
This is the Argentine Ministry of Economy building taken in Buenos Aires, the capital of Argentina, on August 4, 2020.On the same day, the Argentine government issued a communiqué announcing that it had reached a debt restructuring agreement of nearly US$70 billion with international creditors. (Published by Xinhua News Agency, photo by Martin Sabara)
According to a report recently released by the British research organization "Jubilee Debt Campaign", the average proportion of debt service in fiscal revenue of emerging market and developing economies has increased from 2010 to 2010. will rise from 6.8% to 14.3% in 2021, highlighting the scale of global debt and the severity of debt risks.
Desmond Lachman, a senior fellow at the American Enterprise Institute, told reporters that the debt of emerging markets and developing economies is at an unprecedented high and is extremely vulnerable in an environment of interest rate hike cycles and a slowdown in global recovery. The global economy should prepare for a possible wave of debt defaults in emerging market and developing economies.
When attending the 2022 World Economic Forum video conference in January, International Monetary Fund President Georgieva said that the Federal Reserve’s tightening of monetary policy may have an impact on some economies whose economic recovery is already weak, especially those with higher dollar debt. For economies with high interest rates, rising U.S. interest rates may increase the cost of repaying U.S. dollar debt for these economies. She said that about 60% of the world's low-income economies are currently in debt distress, and the lack of international support and assistance may lead to "big trouble."
Source: Xinhua News Agency
