U.S Interest Rate Uncertainty- The Repercussions

Since early this year (2015) there has been speculation that the fed would raise interest rates in September due to high-expected inflation (by developed countries standard of course)- around 2%

There was, and there still is speculation that the U.S Federal Reserve will raise interest rates. The lack of certainty over whether or not this will eventually happen one of these days can be expected to cause even more volatility in currencies of developing countries and emerging markets.

An interest rate hike would lead to capital inflow into the U.S from emerging markets leading to depreciation of their respective currencies against the U.S dollar. This is at a time when emerging markets are already facing serious volatility and downturn. For export based economies, particularly those who have the U.S as a major trading partner, this is not at all bad news as according to Keynesian economists, we should expect a rise in their GDP.

Since early this year (2015) there has been speculation that the fed would raise interest rates in September due to high-expected inflation (by developed countries standard of course)- around 2%, but inflation has fallen short of expectations irrespective of the fact that the the U.S economy has continued to thrive. Interest rate is raised in times of high inflation in order to reduce consumption and investment spending so that there is less money circulating in the economy. Now unlike most other developed countries, the U.S does not have an actual inflation target, probably in order that policy makers have the flexibility to decide which economic policy tools to use to reach whatever goal politicians and economists (whoever actually calls the shots) deem to be the most important at any point in time. That is, the decision to act is completely at the discretion of the federal reserve and policy makers.

Another repercussion of rising U.S interest rate is that we will see a fall in dollar denominated commodity prices as the dollar appreciates. This is unsettling news as oil price is just starting to recover after haven fallen to an unprecedented low. As for agricultural commodities, we are seeing a rise in the prices of cocoa, coffee, soybeans, sugar etc most probably due to the El Nino forecast. A U.S interest rate hike might counter some of this upward movement for the dollar-denominated commodities.

During this period when the China growth slow down is hitting economies, particularly developing economies and emerging markets, the last thing the market needs is uncertainty about the U.S interest rate.