On July 28, the Federal Reserve announced at its July interest rate meeting that it would raise the federal funds rate by 75 basis points to a target range of 2.25% to 2.5%. So far, the Fed has raised interest rates four times in a row this year, and raised interest rates twice in a row by 75 basis points. Fighting inflation has become the primary goal of current monetary policy. 

 

Lv Haomin, a researcher at the Bank of China Research Institute, analyzed that the Fed raised interest rates by 75 basis points in July, and the pace of future interest rate hikes may slow down; the Fed's continued interest rate hikes have obvious spillover effects, and emerging markets are alert to three major risks.

 

 

 

In terms of interest rate decisions, the Fed reiterated that continued rate hikes are appropriate and remains firmly committed to bringing inflation back to its 2% target. At present, the inflation rate in the United States remains high. In June, the consumer price index (CPI) increased by 9.1% year-on-year, a record high in nearly 41 years.

 

 

 

This reflects supply and demand imbalances related to the Covid-19 pandemic, higher energy prices and broader price pressures, with the Russia-Ukraine conflict and related events putting additional upward pressure on inflation. 

 

As a result, the Fed is "highly concerned about inflation risks" and will continue to significantly reduce the size of its balance sheet. In terms of the pace of rate hikes, it may be appropriate to slow rate hikes in due course as rates rise to high levels.

 

 

 

The Fed's future rate hike path depends on economic data and will not provide policy guidance for its September meeting. The Fed hopes to raise interest rates to a moderately restrictive level, in the 3% to 3.5% range, by the end of the year.

 

 

 

The domestic demand momentum of the U.S. economy has weakened, and it faces the risk of a "technical" recession. The Fed acknowledged that recent spending and production indicators have softened. 

 

According to the latest forecast of the Federal Reserve Bank of Atlanta in the United States, the US real gross domestic product (GDP) will shrink by 1.2% year-on-year in the second quarter, with negative growth for two consecutive quarters, falling into a "technical recession".

 

 

 

First, household consumption showed signs of weakness. According to statistics from the World Federation of Large Enterprises, the U.S. consumer confidence index fell to 95.7 in July, the lowest level since February 2021. 

 

Concerns about inflation, especially higher gasoline and food prices, weighed on consumption. Consumer purchase intentions for cars, homes and major appliances all retreated further in July as the Federal Reserve raised interest rates to rein in inflation.

 

 

 

Second, the production and operation activities of enterprises slowed down. High inflation dampened demand for service providers, leading to an across-the-board contraction in factory orders and production. According to statistics from S&P Global, the initial value of the U.S. Composite Purchasing Managers’ Index (PMI) in July was 47.5.

 

 

 

Among them, the initial value of the service PMI was 47, the initial value of the manufacturing PMI was 52.3, and the initial value of the manufacturing output index fell below the 50 line of prosperity and decline, hitting a new low in two years.

 

 Third, real estate sales declined significantly. In the first half of the year, U.S. existing home sales fell sharply, from a high of 6.49 million in January to 5.12 million in June, a drop of 21%. Home sales contract cancellations jumped to 14.9% in June from a relatively normal 12.7% in May.

 

 

 

 

The Fed's continued interest rate hikes have obvious spillover effects, and emerging markets are alert to three major risks. First, the tightening of monetary policy has suppressed global demand, leading to a slowdown in economic growth in emerging markets. 

 

Against the backdrop of the Fed raising interest rates, global financial conditions have tightened and the financing environment has deteriorated.

 

 

 

The refinancing costs of small and medium-sized enterprises and low-rated companies increase, and the risk of credit default and bankruptcy increases, which in turn inhibits investment and economic growth.

 

 Second, the dollar continued to strengthen, and the pressure on currency depreciation in emerging markets increased. Faced with the dual pressures of high inflation and a rising dollar index, some emerging markets have fallen into currency crises and even financial crises.

 

 

 

Since 2022, Sri Lanka, Laos, Turkey and other emerging market currencies have depreciated by as much as 44.6%, 25.4% and 22.2% against the US dollar, respectively. Some financially fragile countries even face sovereign debt risks. 

 

Third, emerging markets suffered capital outflows. Emerging market capital outflows have accelerated since March. From March to June, the emerging market portfolio saw consecutive net outflows, with a cumulative outflow of $42.7 billion. Among them, the net outflow of portfolio funds in June was $6.6 billion.