Global Economic Insights: Global Effects of U.S. Monetary Policy

In the latest edition of Global Economic Insights, LeadingRE’s Chief Economist Dr. Marci Rossell, Ph.D., addresses how U.S. Monetary Policy impacts financial markets worldwide.

The Federal Open Market Committee of the Federal Reserve met and once again increased the Federal Funds Target Rate in September 2018. The impact of the most recent rate increase is being felt in financial markets worldwide, but unlike the last time we had a crisis like this in the late-1990s, there is no spillover effect into healthier markets.

After the financial crisis of 2008, the Federal Reserve kept interest rates low for about 10 years. A low interest rate environment in the United States tends to have two effects on emerging markets:

1. Global investors look worldwide for higher returns. Therefore, financial and bond markets do well in peripheral countries such as the Philippines, Indonesia, Turkey, Brazil, Argentina, South Africa and Russia.

2. Countries outside U.S. borders borrow in dollar denominated bonds.

However, as interest rates in the United States begin to rise, the opposite occurs:

1. Funds flow out of emerging markets.

• Stock markets in the Philippines, Indonesia, Turkey, Brazil, Argentina, South Africa and Russia have not done well yearto-date.

2. Debt borrowed in denominated dollars becomes more expensive to service.

• Interest rates have risen in Argentina.

• Turkey is experiencing a currency crisis.

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