How Does The Federal Reserve Raise Interest Rate Cards?

The Fed's rate hike has removed an important uncertainty, but it has increased more uncertainties. How will emerging economies react to this?

Considering the huge

With the weakening economy and the deepening of global economic and financial integration, the Fed's interest rate raising will bring capital back to the United States, which will inevitably lead to an impact on emerging markets, especially currency devaluation and capital outflow.

Just as about half of the analysts surveyed by Bloomberg surveyed expected to cut interest rates on Thursday, cutting the benchmark interest rate for the second consecutive quarter, from 1.75% to 1.625%, indicating that the region and the Federal Reserve's monetary policy are on the path of divergence in Taiwan.

The weak Taiwan export shows no signs of recovery in the region's economy.

Hongkong has taken action to show that the region follows the Federal Reserve's interest rate hike.

On the Federal Reserve

A few hours later, the Hongkong Monetary Authority announced on Thursday morning that it will raise its benchmark interest rate from 0.5% to 0.75%, the first time in nine years.

Hongkong uses the Hong Kong dollar pegged dollar linked exchange rate system.

Chen Delin, chief executive of the HKMA, said at a press conference on Thursday that the Fed's policy of raising interest rates means that emerging markets will continue to experience pressure on capital outflows and exchange rate depreciation, and that economic growth and asset markets will also be under pressure: the speed of capital outflow in Hongkong will depend on the Fed's interest rate increase and the exchange rate difference between the US dollar and the Hong Kong dollar.

Whatever the reason, if the Federal Reserve raises interest rates faster than expected, Hongkong's capital outflow and the rate of interest rate hike will also grow faster.

Jon Hilsenrath, a spokesman for the Federal Reserve news agency, said after the announcement of FOMC's interest rate increase that the Fed's action now may create new pressures on emerging markets, especially those with large US dollar loans. The debt burden will increase as the US dollar appreciates.

Goldman Sachs has pointed out that the credit leverage of emerging markets will be particularly vulnerable in the face of the first increase in interest rates in the United States in the past ten years, and China, South Korea, Turkey and Mexico are particularly worried.

According to data from the BIS, by the end of the two quarter, the non bank credit US dollar loans outside the United States amounted to US $9 trillion and 800 billion, of which about 3 trillion and 300 billion went to emerging markets.

From the first quarter of 2009 to the two quarter of this year, non bank credit loans of some emerging economies doubled even.

"This is Asia's Achilles heel," CNBC quoted Rob Subbaraman, an Asian economist at Nomura, in a press conference last week. "Compared with other emerging economies outside Asia, Asia's emerging market economies have suffered more than four times the financial imbalance," he said.

Capital outflow risk

"The biggest concern for emerging markets is currency related."

Megan Greene, chief economist of John Hancock Asset Management, told the newspaper that the dollar will continue to appreciate as other central banks continue to ease monetary policy and the Fed gradually increases interest rates.

Emerging market countries are still under the shadow of serious capital outflow.

Investors have withdrawn funds from emerging markets up to $500 billion this year, the first annual outflow in decades.

The problem now is that the Federal Reserve will continue to raise interest rates in the next year, which may trigger stampede in emerging markets.

Will the financial crisis be repeated in 98 years?

Will this lead to the recurrence of the Asian financial crisis in the late 90s?

According to Andrew Tilton, chief Asia Pacific economist at Goldman Sachs, despite the per capita income, many Asian economies' liabilities exceed people's expectations, but they will not repeat the financial crisis that swept through Asia in the same period. This is largely due to the fact that compared with the current year, lenders are mainly non-financial enterprises.

However, as mentioned before, the links between different financial markets all over the world are very close. The Fed's rate hike is not a one-way impact on emerging markets, which in turn will be affected by overseas markets.

For example, in the middle of August, the Central Bank of China guided the depreciation of the RMB, and its shock wave spread immediately in the global market, and was regarded as an important reason for the Federal Reserve to postpone raising interest rates in September.

If China allows the yuan to further depreciate and refocus on a basket of currencies instead of just focusing on the dollar, China may end its deflation abroad or reverse the global interest rate hike.

Hong Kong's chief strategist Hong Hao, 17, commented that the PBOC's attitude towards the depreciation of the renminbi will affect the Chinese market's response to the Fed's rate hike.

The elasticity of RMB exchange rate has increased, making China better able to cope with external uncertainties, especially when the Fed enters the interest rate cycle.

Therefore, the tolerance of the central bank to the depreciation of the local currency is the key.

Asian stock markets generally rose on the first trading day after the Fed raised interest rates.

Wang Han, a macroeconomic analyst at Xingye securities, said that under the full expectation of the market, the Fed's interest rate increase has limited impact on the emerging market as a whole.

Citic securities analysis said that with the start of the US interest rate hike, the pressure of outflow of funds in 2016 will continue.

With the tightening of financial conditions and the pmission of China's downward pressure on the economy, the emerging Asian economies still face downside risks.