The Federal Reserve gives as a matter of fact that it will have to make its fourth consecutive 0.75 percentage point hike in Federal Funds rates in November; and adds that this will happen regardless of the economic and geopolitical effects it could cause outside the United States.
This decision by the Central Bank of the United States would bring interest rates from the current level of 3% / 3.25% to a new guideline of 4.25% / 4.5%; and this increase it would be temporary until we see if the inflation rate – currently at 9.1% per annum – will begin to decline, which has not so far been the case.
This means, in short, recession and rising unemployment in the United States and around the world. The Federal Reserve itself estimates that unemployment will reach 4.5% by the end of the year (currently at 3.5%, the lowest level in the last 60 years); and at the same time the economy would shrink to an expansion level of only 0.2% in 2022, to rise to 1.2% next year.
The key to the Federal Reserve’s highly restrictive policy is the systematic reduction of the core inflation rate (“Core”) – without food or energy -, which should be limited from the current level of 4.5% per year to 3.1% in 2023 and 2.3% the following year, until reaching a slightly above the target set by the body chaired by Jay Powell of 2% for the year.
It is clear that the drastic increase in the interest rate made by the Federal Reserve dramatically affects emerging and developing countries.
For this investors they have already massively withdrawn a record $ 70 billion from funds trading emerging market bonds so far in 2022; and in the last week alone, for example, they have withdrawn $ 4.2 billion from emerging market funds, according to JP Morgan’s estimates, which is the largest withdrawal in this period since the records were kept in 2005.
JP Morgan raised its forecast for extracting assets from emerging market bond funds in 2022 to $ 80 billion, when it predicted a figure of just $ 55 billion earlier this year.
These numbers indicate it capital outflows are accelerating of funds from emerging countries, which contrasts sharply with the positive balance they showed in the previous 6 years, when they received more than 50 billion dollars a year.
The emergence of this underlying trend affecting emerging countries responds to the fact that the dollar has appreciated more than 20% over the past year; and this is due to the combined effect of the Federal Reserve’s rise in interest rates and the “refugee country” status that the United States has in any global crisis situation.
What is remarkable is that the “superdollar” that is the result it also affects advanced countries; and that is why the euro is now only worth $ 0.98, which is the lowest value since the single currency was launched in 2001.
This confirms the absolute hegemony of the US dollar in the international financial system, where the US currency is the common currency of the system; and the fundamental source of US hegemonic power in the world.
It should be added that the euro was equivalent to US $ 1.11 in the first 3 months of the year, immediately before the Russian invasion of Ukraine on February 24.
This comes when the European Central Bank (ECB) raised interest rates by 0.5% last month to cope with annual inflation of 8.5%.
At the same time, the price of energy in Europe has increased by more than 700% last year, following the cut of Russian gas which supplies 40% of the total demand of the European Union.
This reversed the continent’s traditional trade surplus and turned it into large current account deficit.
The same happened with the British pound, historically overvalued against the US dollar, and sank 10 days ago until it reached a virtual parity with the US currency, which occurred when its current account deficit reached a record of more than 8% of GDP.
Therefore, JP Morgan argues that this year investors will place 17% or less of their capital in the bond market, which is to say that this minimum percentage is what they will place outside the United States.
For its part, Germany, leader of the Eurozone and main manufacturing country in Europe – and third in the world – recorded an annual inflation rate of 10.9% in September (rising to 8.8% in August). This is the highest inflation level in the Federal Republic in the past 70 years; and this happens with an economy that is fourth in the world (3.81 trillion US dollars / 4% of world GDP), which will contract by 7.9% in 2023, or more, according to the consensus of the research institutes. of the RFA.
This whole picture of the world situation, with epicenter of the Federal Reserve’s interest rate hikeit would continue in 2023 and 2024. In short, a global recession with high inflation of 7.8% of the annual average rate in the world system as a whole.
Source: Clarin
