Will an Increase in Interest Rates by the U.S. Fed Cause a Financial Crisis in Emerging Markets?
The Center for China in the World Economy (CCWE) hosted Beth Ann Bovino, U.S. Chief Economist at S&P, on April 16, 2015 for a lecture titled: “Will an Increase in Interest Rates by the U.S. Fed cause a Financial Crisis in Emerging Markets?” Dr. Bovino addressed the trends in the current labor and financial markets in the United States and presented an analysis of the factors that may affect the possible rise of interest rates, with the opinion that the U.S. Fed will likely increase interest rates in September of this year.
In the speech, Dr. Bovino pointed out two specific tasks of the U.S. Fed: first, to manage inflation, second, to increase employment and control the long-term unemployment rate between 5.2% and 5.8%. This implies that there is room for a possible interest rate rise by the Fed. The current unemployment rate is approximately 5.5%, which is within the proper range; moreover, the real estate market is also gradually picking up, and the core inflation is under 2%. Judging from these fundamental factors, Dr. Bovino believes that September will be the best time for an increase in interest rates. At the same time, Dr. Bovino also pointed out two factors that might slow down the Fed’s increase of interest rates, i.e., oil prices and the appreciation of the U.S. dollar. The fall of oil prices from $100 to $50 will have an impact on the energy sector in the United States, the largest energy provider in the world; and the appreciation of the U.S. dollar may also reduce the international competitiveness of the export-oriented manufacturing industry.
In terms of the possible impact of the first increase of interest rates by the Fed, Dr. Bovino said that countries in emerging markets and those relying greatly on the export of energy, e.g., Russia, in particular, will be affected most seriously. For China, the rise of interest rates of the U.S. dollar may also lead to a certain extent of capital flight, for which China must be properly prepared.
The event concluded with a dialogue between Dr. Bovino and the students in attendance on issues ranging from the strike among workers in the U.S. fast-food industry, to the achievement of the American Dream of the past and the present, to the impact of rising interest rates. Questions also included issues such as the income gap in the United States and the economic growth rate, etc.
