
Fortune News | Jan 21,2023
Jun 18 , 2022
By Christian Tesfaye (
Christian Tesfaye (christian.tesfaye@addisfortune.net) is a researcher and Fortune's Deputy Editor-in-Chief whose interests run amok in the directions of political thought, markets, society and pop culture.
)
The US Federal Reserve is not playing around anymore. After months of insisting that inflation is “transitory,” it has now declared war, firing what amounts to weapons of mass destruction at American economic activity. Last week, it raised federal funds interest rates by three-quarters of a percentage point, the biggest hike in decades. The federal funds rate, the interest rate at which banks borrow from one another from their reserve accounts, is a benchmark used to determine rates in the rest of the economy. When it goes up, so do interest rates for mortgages, bonds and credit cards.
The rate hike is the most serious move taken by the Federal Reserve under Jerome Powell, its chair, to combat inflation. Until now, there was a slight possibility that a “soft landing,” taming inflation without pushing the country into recession, could be realised. The gloves were off after the consumer price index (CPI) came in higher than expected last month. The Federal Reserve hiked by 0.75pc and indicated it might do so again. Most economists now expect a recession – two consecutive quarters of negative growth.
This is big for the US and the rest of the world. As the theme seems to be these days, it spells even more trouble for developing countries. A recession will mainly have short-term consequences. When the US is less resilient, there is less demand for exporters, and less remittances and tourism receipts will come from there. But the rate hikes will have long-term impacts, which may last as long as inflation persists.
A major headache is capital flight to rich countries. Over time, it will not be only the US increasing interest rates. It will also be other developed countries – if it is not to combat inflation, it will be to protect against capital flight from their own countries. The cost of capital will go up as the competition for loanable funds heats up. Without competitive economies, most developing countries will find it harder to attract capital for investment, infrastructure financing or economic development.
Debt servicing costs will also grow. High-interest rates will attract capital to countries such as the US. Investors will dump assets held in other countries to invest in the US because the returns will be higher. When capital rushes into a few countries, the currencies of those countries strengthen. If that country is the US, dollar-denominated debt becomes expensive to service, a headache that countries such as Ethiopia do not need.
Capital flight is already occurring and several developing countries are struggling with foreign currency problems (partly because the import of basic items has also become expensive). The examples are many and varied. The most talked about country in this instance is Sri Lanka, which is getting coverage. The country faces disaster and has already defaulted on its debt. Worse still, it has inspired a socio-political crisis. In Kenya, edible oil prices rose as a major producer cut production, citing a dollar shortage to import inputs. In Pakistan, officials called for a cut back on chai, a popular drink made from tea leaves (which are imported). In Ethiopia, black market dollar rates have gone up to record highs.
When so much is at stake, then, much of the world finds itself in a strange position of wishing Chair Powell a stroke of good luck on the war he is waging against inflation. He is on the front lines of the battle, commanding the forces of interest rates and open market operations against a formidable foe. At the same time, he is trying not to damage US economic growth. Let us hope he pulls off this juggling act for all our sakes.
PUBLISHED ON
Jun 18,2022 [ VOL
23 , NO
1155]
Fortune News | Jan 21,2023
Fortune News | Aug 22,2020
Radar | Mar 26,2022
Viewpoints | May 28,2022
Editorial | Aug 21,2021
Viewpoints | Feb 09,2019
View From Arada | Aug 21,2021
Fortune News | Mar 09,2019
Radar | May 15,2021
Photo Gallery | 64187 Views | May 06,2019
Photo Gallery | 56058 Views | Apr 26,2019
Fortune News | 50977 Views | Jul 18,2020
Fortune News | 50568 Views | Sep 01,2021
Dec 24 , 2022
Biniam Mikru heads the department of cabinet affairs under Mayor Adanech Abiebie. But...
Jul 2 , 2022 . By RUTH TAYE
On a rainy afternoon last week, a coffee processing facility in the capital's Akaki-Qality District was abuzz with activ...
Nov 27 , 2021
Against my will, I have witnessed the most terrible defeat of reason and the most sa...
Nov 13 , 2021
Plans and reality do not always gel. They rarely do in a fast-moving world. Every act...
Jan 28 , 2023
It is not common to see an appointment for a senior federal government office stir de...
Jan 21 , 2023
Eyob Tekalign, state minister for Finance, took to social media platforms last week t...
Jan 14 , 2023
The longing for normalcy and a semblance of individual and collective security in Eth...
Jan 7 , 2023
The hallmark of Ethiopia's contemporary leaders could be a fascination with grandeur...
Jan 28 , 2023
In what has become common in the past four years, a new round of nominations was put before Parliament last week. These nominations by the P...
Jan 28 , 2023 . By BERSABEH GEBRE
Aklilu Wubet of Wegagen Bank and his executives had a lot to celebrate when they met rather anxious share...
Jan 28 , 2023 . By BERSABEH GEBRE
The Oromia Public Enterprise is edging closer to bagging Ayka Addis Textile Factory for 1.82 billion Br....
Jan 28 , 2023 . By EMMANUEL JORGE
Last week saw an uncharacteristically polemical moment after parliamentarians questioned three nominees o...