Interest rate hikes around the world particularly threaten emerging markets and developing countries, who now have a historically high share of their external debt subjected to variable rates. Emerging markets have faced these sorts of issues before. During the 2013 “taper tantrum,” when bonds sold off in response to the Fed’s stated plans for tapering, emerging markets and developing economies saw increased volatility across their financial markets and were forced to tighten monetary policy to retain capital, further triggering a slowdown in the real economy. Today, higher interest rates threaten to create maturity mismatches in emerging market financial firms, leading to financial imbalances and insecurity or even crisis. Slowing economic growth and heightened financial instability, combined with higher commodity prices due to the war in Ukraine, offer a grim outlook for many of these emerging and developing areas. Even though high inflation in the United States is painful, it is not the worst problem to have; as such, it's right for the Fed to consider poorer nations as it devises its policy.
Source: World Bank Report
Thomas Triedman, a sophomore at Yale, is a Summer 2022 Collegiate Associate at the Manhattan Institute
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