US Interest Rates and Developing Economies

Liu Xinyang 1M151102-4Risa Shimono 1M170435-3Rena Ren 43531464Joakim Flores Andersson 　1M141001-8

The U.S. Interest Rates and the Federal Reserve

Federal Reserve

The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking of the U.S.A.

Federal Reserve

★ was created in 1913★ has 12 banks in different areas★ consists of:

○ 12 Federal Reserve banks

○ Board of Governors of the Federal Reserve System

○ Federal Open Market Committee

★ main purpose: ○ To address the problem of banking panics.

○ To serve as the central bank for the U.S.

○ To supervise and regulate banking institutions.

○ To maintain the stability of the financial system and contain systemic risk in

financial markets.

○ To respond to local liquidity needs.

○ To strengthen the U.S. standing in the world economy.

○ ...

The Relationship between the U.S. interest rates and the Federal Reserve

★ The meeting of the Federal Reserve decides the future monetary

policy of the U.S., including the interest rates.

★ There were 5 times in the history that the Federal Reserve raise

the interest rates of the U.S.

○ period: 1983 -- 1984 benchmark interest rate: 8.5% -- 11.5%

○ period: 1988 -- 1989 benchmark interest rate: 6.5% -- 9.8125%

○ period: 1994 -- 1995 benchmark interest rate: 3.25% -- 6%

○ period: 1999 -- 2000 benchmark interest rate: 4.75% -- 6.5%

○ period: 2004 -- 2006 benchmark interest rate: 1% -- 5.25%

The Federal Reserve raises the U.S. interest rates

★ Purpose/reasons: ○ to control the inflation

○ to expedite the economic development

○ to stabilize the prices

○ to raise the currency exchange rate indirectly

○ to maintain the long-term increasing of the quantity of the currency and the

credit is the same to the potential long-term increasing of the economy

○ to promote employment

○ to encourage people to deposit money

○ to reduce consumption and the circulating capital in the market

○ to make the interest rate be appropriate

Impacts

★ the dollars currency rate would rise

★ foreign investors would be more willing to hold dollars

★ beneficial to the import of the U.S.

★ more currency would flow to the U.S.

Domestic Impacts on Rising US Interests Rates

Domestic Impact (Personal Effect)

-Increased cost of borrowing

-Improved return for savers

-Higher mortgage interest payments

-Increased cost of bank loans

Domestic Impact (Economic Impact)

-Inflation will tend to be lower

-Economic growth will tend to be slower

-Unemployment could rise

-Could cause a recession later

Domestic Impact

2016-2017 US Domestic Effect

-Borrowing are historically low, The consumers are get used to it.

-Saving

are stuck, banks are not keen to increase the deposit rates

Global Impacts on Rising US Interest Rates

US Interest Rate in the Past (late 2000s)

● The financial crisis (2007-2008): credit expansion and subsequent implosion - a

banking crisis more fundamentally damaged the global economy than many initially

predicted

○ Low interest rates in the past decade = Low financial asset prices

○ Market was overheated by property in many asset classes – bonds, stocks and real estate.

○ Low interest rates have benefited owners of financial assets but middle-income wage owners, pensioners, and others living on fixed income, dividends or interest payments have done relatively poorly

● Financial reform quickly delivered in 2008-2009

○ Rising U.S. interest rates = higher debt repayments

○ Huge Debts on governments that had over-borrowed

○ Banks, businesses and consumers had become drunk on easy credit

Implications of Rising US Interest Rate

● The rate rise is a signal about the strength of

the US economy and shows that the long march

back to more normal economic conditions can

begin

● However, the latest data and market reactions

are signaling that rates may rise by more than

normal as inflationary pressures pick up in the

U.S.

○ According to market consensus, they’re

set to rise by a further 75 percentile this

year

● And U.S. interest rates don’t just affect the

U.S…

Global Implications：Hong Kong

How rising US interest rates will affect Hong Kong?

● Hong Kong must follow U.S. interest rates because HK dollar is attached to U.S.

dollar

○ Hong Kong Monetary Authority = U.S. Federal Reserve

● Hong Kong asset prices, particularly real estate, will be more volatile than most other markets

● Hong Kong cannot raise and lower its interest rates to control its own domestic inflation or rising/falling asset prices○ If interest rates lower than needed – helps push asset prices higher○ If interest rates higher than needed - worsen downturns and recessions

● Example: 1997 Asian financial crisis, followed by 6 years of downturn due to high interest rates

Global Implications: What about other countries?

TREND

Most countries in the Asia

pacific region follows pretty

closely to the changes of U.S.

economy and its rising interest

rates

It is unlikely that interest rates

in the region would go against

the U.S. trend

INVESTMENT

The higher interest rates in

America, investment capital

will be encouraged across the

Atlantic and away from Asia in

the hunt for better returns

Rising U.S. interest = stronger

dollar = cheaper exports to

America = European and Asian

economies benefit

REAL ESTATE

Rising interest rates is negative for real estate prices, and that falling rates will push property prices higher

Real estate prices tightening

over the coming year (e.g. Hong

Kong, China, and Singapore,

Australia, New Zealand,

Taiwan, and Malaysia)

Future Outlooks

The U.S. Interest Rates and the Impact on Developing Countries

Why is the risen US interest rate so important to developing countries?

● Some developing countries also use the US dollar, or have their currencies tied to it.○ Ecuador, Zimbabwe (US dollar)○ UAE, Panama (Pegged to the US dollar)

● Affects exports○ Increased value of local currency○ Exports become more expensive○ Forced to reduce prices or lose business

● US debt (in dollars) is tied towards the power of the US dollar (Turkey)○ New loans will cost more○ Debt will increase proportionally

● Countries that don’t have their currency tied to the US dollar are also affected○ Strengthening of the US dollar will make the exports of countries that aren’t tied look less

desirable and looks “cheaper”

Rising US Interest Rate and Developing Countries Today

● The US Federal Reserve is expected to raise interest

rates this week, with financial markets expecting two or

three further upward moves during 2018

● The expected rise in US interest rates will increase

financial pressures and developing countries already

struggling with the 60% jump in their debt repayments.

● Study of 126 developing nations showed that they were

devoting more than 10% of their revenues on average to

paying the interest on money borrowed.

● Fall in global commodity prices had reduced the income

of many governments that rely on exports.

Rising US Interest Rate and Emerging Markets

● Medium to Long term effects● Debt payments will be higher through the stronger dollar● External finance unavailability