(SONG CHEN / CHINA DAILY)
The US Federal Reserve raised its benchmark interest rate by 75 basis points on Wednesday, the second 75-basis-point hike since June and the fourth interest rate hike this year. In all, the Fed has raised the interest rate by 225 basis points this year, increasing the federal funds rate from 0-0.25 percent to 2.25-2.5 percent.
In terms of both magnitude and speed, the United States' latest rate hikes are the most aggressive since the 1980s and will have a huge impact on the US and world economies.
The immediate cause of the Fed's aggressive interest rate hikes is of course the high inflation in the US. According to the US Bureau of Labor Statistics, inflation has been soaring in the country since October 2021, hitting a record high of 9.1 percent in June 2022, the highest since November 1981. It was not only higher than the 8.6 percent in May but also higher than the 8.8 percent market forecast.
And despite the unemployment rate remaining low, at 3.6 percent, soaring inflation has added to the misery of ordinary US consumers.
Yet Fed Chair Jerome Powell said at a news conference on Wednesday that he wants to raise rates to 3-3.5 percent by the end of the year, stressing that he will not hesitate to take bolder steps if needed.
The Fed has also said that it will accelerate "balance sheet reduction", which started in September, as planned, raising the maximum monthly cut in mortgage-backed securities from $17.5 billion to $35 billion, while the maximum monthly reduction in Treasury securities will be increased from $30 billion to $60 billion.
The concurrence of interest rate hikes and balance sheet reduction will lead to a massive reduction in global dollar liquidity, which will have a huge impact on the global economy. Ordinary Americans may welcome the taming of inflation, especially if job demand remains strong, because that will ease the monetary pressure on them to a certain extent. But the interest rate hikes and balance sheet reduction will raise the specter of an economic crisis in the US. The immediate cause of the US' subprime crisis in 2007 was the huge bubble created by a long period of low interest rates that was punctured by a sudden increase in interest rates.
During the Donald Trump administration, the Fed pursued quantitative easing. And after the COVID-19 pandemic broke out in early 2020, the US administration released a huge "bailout fund", with the amount of dollars injected into the market in that year being as high as 20 percent of the total dollars in circulation at the time.
As a result, the US stock market has been hitting new highs. However, when the dollar bubble ebbs due to interest rate hikes and balance sheet reduction, there is a good chance of the many assets, both real and financial, which have been pushed up being re-priced. Also, whether the US economy can have a smooth soft landing is a matter worthy of serious attention.
Given that the US dollar is the most important global settlement currency, most international trade would be impossible without it. But in the face of aggressive interest rate hikes by the Fed, most non-dollar countries will be in a dilemma, because if they don't follow the US in raising their interest rates, their currencies will likely depreciate and they could even see an inverted interest rate gap against the dollar, which would increase the risk of capital outflow from their economies and jeopardize their international payment structure.
Indeed, the Fed's latest rate hikes have caused socioeconomic unrest in some countries and regions. For many countries, the only one way out of the current situation created by the rising dollar rates is to develop their economy better and strengthen their currency.
The author is a professor at the Institute for International Strategic Studies, the Party School of the CPC Central Committee.
The views don't necessarily reflect those of China Daily.