The FED’s global influence Notable lessons for international markets - The FED's global influence Notable lessons for international markets

The FED’s global influence Notable lessons for international markets

Author: Michael view: 45 Update: 02/10/2023 Downloads: 0

The world financial market is witnessing great fluctuations due to the tightening monetary policy of the US Federal Reserve (FED). The FED’s continuous increase in interest rates to control inflation is having a profound impact on the global economy, especially emerging markets. From historical lessons, we can draw some important observations about the FED’s influence on international financial markets.

The FED’s global influence Notable lessons for international markets - The FED's global influence Notable lessons for international markets

The FED’s global influence: Notable lessons for international markets

1. FED policies have a strong impact on global capital flows

When the FED raises interest rates, capital will flow to the US market to seek higher returns. This causes capital to withdraw from emerging markets, causing a decline in currency value and increasing borrowing costs for countries. For example, after the FED raised interest rates in 2013, many developing countries simultaneously witnessed currency devaluation and current account deficits.

This shows the great influence of the FED on global capital flows. Emerging markets need to be prepared to respond to the risk of sudden capital outflows when the FED changes policy.

The FED’s global influence Notable lessons for international markets - The FED's global influence Notable lessons for international markets

2. Global growth slows as the FED tightens monetary policy

History shows that every time the FED raises interest rates to curb inflation, global economic growth often slows down. The reason is that borrowing costs have increased, causing investment and consumption to decline.

For example, in 1994, the Fed raised interest rates sharply, causing US GDP growth to drop from 4% to 2%. Similarly, the monetary tightening period of 2004-2006 also reduced the growth rate of the economy.

Therefore, countries need to be aware that FED policies can slow down growth, requiring governments to have appropriate fiscal and monetary policies to boost the economy.

3. Risk of reversal of investment capital flow

When the FED raises interest rates, investors often withdraw capital from emerging markets to invest in the US market. This could lead to a reversal of capital flows, putting countries under great pressure on their current accounts and exchange rates.

For example, after the FED raised interest rates in 2013, many developing countries such as Brazil, Indonesia, India, Turkey… all recorded strong capital outflows, currency devaluation and fiscal deficits. current account soared.

Therefore, markets need to be alert to the risk of capital flow reversal when the FED tightens monetary policy, and take appropriate responses.

4. Global financial market risks

A rapid increase in interest rates by the FED could lead to risks of instability in the global financial market. The reason is that borrowing costs have increased and asset prices have plummeted, making businesses and banks vulnerable to bankruptcy, causing a chain effect.

For example, the 1997-1998 Asian financial crisis originated from the FED sharply increasing interest rates, causing many Asian currencies to depreciate and banks and businesses to go bankrupt.

Therefore, management agencies need to be very cautious and have a strategy to respond to monetary policy shocks from the FED to limit the risk of market instability.

5. Investment opportunity in the US market

The positive side is that when the FED raises interest rates, the US market becomes more attractive to investors due to increased bond yields. This may be a good opportunity to invest in US stocks and bonds to take advantage of high yields.

However, investors also need to consider the risk that the US market may decline due to slowing economic growth. Therefore, investment strategies need to be very cautious, carefully calculating risks and opportunities.

6. Conclude

In general, FED policies have a great influence on global financial markets. Countries and investors need to clearly understand the potential impacts to have effective response strategies. It is important to maintain macroeconomic stability and support the economy through difficult times when the FED tightens monetary policy. Besides, new investment opportunities may also appear, requiring the acumen and strategic vision of policymakers as well as investors.

Frequently asked questions

1. Why does FED policy have such a big influence on global financial markets?

Because the US is the world’s largest economy and the USD is the international reserve currency, the FED has a strong influence on global capital flows and interest rates. FED policies can cause shocks to the international financial system.

2. Why are emerging markets vulnerable to FED policy?

Because emerging markets often rely heavily on foreign capital and have a weak balance of payments, the economy is vulnerable to external shocks. FED policies cause capital to withdraw from these markets, causing financial difficulties.

3. What should developing countries do to respond to FED policies?

Countries need to strengthen their macroeconomic foundations, accumulate foreign exchange reserves, diversify capital sources, and prepare flexible market intervention tools to respond to monetary policy shocks from the FED.

4. When is the FED likely to reduce interest rate increases?

When inflation in the US is controlled and reduced to the FED’s target of 2%. When the US economy began to show signs of slowing down and recession. When the US job market is more stable.

5. How could raising interest rates by the FED negatively impact the global economy?

  • Global trade and supply chains are disrupted
  • Reduces investment and consumption, stagnating growth.
  • Increased risk of corporate bankruptcy and financial collapse.
  • Destabilizes finances, exchange rates, and capital markets of countries.
  • Affects and reduces the world economy.

6. What strategy should investors have in the context of FED tightening monetary policy?

Investors need to consider restructuring their portfolios, increasing the proportion of safe assets such as gold, government bonds, and stable currencies. Limit investment in high-risk assets such as stocks and real estate.

Focus on investing in businesses with a healthy financial foundation and good resistance to rising interest rates. Diversify the portfolio into many different geographical areas and fields to spread risks.

Be ready to disburse capital and buy when the market drops too far beyond reasonable levels and at attractive prices. The spirit needs to be calm, not panic selling. Always closely follow policy developments of central banks to adjust strategies accordingly.

7. What impact does the FED’s interest rate increase have on the stock markets of other countries? When the FED increases interest rates, stock markets in many countries often tend to adjust downward because:

  • The opportunity cost of stocks increases when bond yields increase. Investors tend to transfer cash flow to bonds.
  • The outlook for corporate profits decreased due to slowing economic growth.
  • The risk of investing in securities increases. Investors have a cautious mentality and have a more passive approach to the market.
  • However, the level of adjustment also depends on other fundamental factors of each country’s stock market.

8. How should central banks of countries manage monetary policy in the context of the FED increasing interest rates?

  • Consider the level of independence in operating monetary policy, do not imitate the FED machinery.
  • Accept the appropriate level of currency depreciation to balance supply and demand and maintain competitiveness.
  • Flexibly use regulatory tools such as increasing interest rates, intervening in the foreign exchange market… to stabilize the market.
  • Supplement foreign exchange reserves to intervene when necessary.
  • Ensuring system liquidity, supporting businesses and the economy.
  • Closely coordinate monetary and fiscal policies to stabilize the macroeconomy.

9. How can the FED’s interest rate hike affect gold and cryptocurrency prices?

  • Gold tends to increase in price because it is a safe haven when the market fluctuates. Investors tend to turn to gold to prevent risks.
  • Cryptocurrencies can decline in price due to their highly speculative nature, making them susceptible to being sold off when market risks increase. Investors tend to switch to safer assets.
  • However, the trend of cryptocurrencies depends on many macro and industry factors. It is necessary to closely monitor developments to adjust investment strategies accordingly.

10. When can you consider buying risky assets like stocks after the FED raises interest rates?

  • When inflation has peaked and there are clear signs of cooling down.
  • When the FED begins to shift to a dovish state or monetary easing.
  • When the stock market has dropped deeply and is priced attractively.
  • When the economy shows signs of recovery, companies report positive business results.
  • When investors have excessive pessimism and panic. That could be a good time to buy the bottom.

However, it is necessary to be flexible, not to chase the market, but to evaluate the appropriate market entry point based on the economy and business profit prospects.

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