The United States’ monetary policy is determined by the Federal Open Market Committee (FOMC). Policy makers and investors worldwide also anxiously await the U.S. Federal Reserve’s meeting. Relatively, how will the rate hike influence the emerging markets?
It is still a question for some why is the upcoming Fed meeting next week highly important for rising markets like India. Primarily, the result of the conference will sway the global markets. Since the dollar is the world’s reserve currency and America is the largest economy, any movement done by its central bank will definitely affect money supply. From this point on, global financial markets will experience backlashes.
Emerging markets are highly feigned by the decision of Federal Reserve since U.S. has been a chief source of their assets. This relationship has become more robust since the years 2008 and 2009 when U.S. central bank unveiled its monetary policy termed as quantitative easing (QE). Alongside, rates were cut to almost zero.
The series of QE delivered billions of dollars to emerging markets. Withdrawal of the fiscal stimulus has been done. At present, Fed is evaluating a possible raise in interest rates. The invested dollars will now be diverted to America, which resulted to concerns. A rise in interest rate would also entail stronger U.S. dollar, which is the most critical result of the hike.
The values of rising market currencies would likely be depressed with added interest rates. This would also mark the period wherein numerous rising economies will stumble along with their currencies’ feat versus the greenback. With the Fed hike looming, an exchange haul may occur.
Once the Fed interest rates increase, U.S. will welcome money from the emerging markets. The dollar will continue its rebound, which would probably dissuade foreign institutional investors (FIIs) from committing into new expenditures.
Conclusively, India and other rising markets will not benefit from series of Fed interest rate hikes.
The probability of interest rate increase is higher as Fed meeting draws near. Traders seem to have speculated a 25 basis point rate hike.
Nonetheless, the concentration should not only be on the interest rate itself, but also on the authority’s statements and indications of stance following the movement. The Fed officials are anticipated to respond regarding the new administration’s policies on regulation, monetary, and trade, which will impact the U.S. economy. Nonetheless, the central bank seems to shy away from presidential politics and did not even cite the election during its meetings in November and September.