I. Introduction
In the grand chessboard of the global economy, every action of US monetary policy has wide-ranging implications, with interest rate policies drawing particular attention. Since March 2022, the Federal Reserve has entered a new round of rate hikes, raising rates 11 times in just a year and a half, with a total increase of 525 basis points, marking the fastest and most significant rise in the past 40 years. This aggressive rate hike operation is akin to a large stone thrown into a calm lake, stirring up ripples across the global economy and financial markets, garnering widespread attention and in-depth discussion. Analyzing US interest rate policies, exploring their underlying motivations, multifaceted impacts both domestically and internationally, and future trajectories holds significant practical importance for global investors, policymakers, and anyone concerned with economic conditions.
II. Background and Motivation of US Interest Rate Policies
2.1 Curbing High Inflation
After the outbreak of the COVID-19 pandemic, the US government launched large-scale stimulus policies to save the economy. Massive funds injected into the market led to a rapid economic recovery but also resulted in a continuous rise in inflation levels. According to data, from May to September 2021, the US Consumer Price Index (CPI) exceeded 5% for five consecutive months, peaking at 6.2% in October, the highest level since December 1990. Persistently high inflation severely affects the cost of living for the public, eroding consumer purchasing power and disrupting the stable operating environment of the economy. Against this backdrop, the Federal Reserve has made suppressing inflation its top priority. Raising interest rates can increase borrowing costs for businesses and individuals, thereby curbing investment and consumption, reducing the circulation of money in the market to alleviate inflationary pressures and help bring inflation levels back to reasonable ranges.
2.2 Solidifying the International Status of the US Dollar
The US dollar occupies a dominant position in the international monetary system, but in recent years, as the global economic landscape has become more multipolar, the dollar has faced numerous challenges. Other countries are gradually attempting to reduce their dependence on the dollar in trade settlements and foreign exchange reserves. By raising interest rates, the US increases the yields on dollar assets, attracting global capital back to the US. When the returns on dollar assets are more attractive compared to other assets, international investors are more inclined to hold dollar assets, increasing demand for the dollar and thereby solidifying its dominant position in the international monetary system, maintaining US dominance and influence in the global economic and financial arena.
2.3 Adjusting Economic Structure
For a long time, the US economy has faced some structural issues, such as an overreliance on consumption and the financial services sector, with relatively insufficient development in the real economy. Rate hikes have increased borrowing costs, making it more challenging for those businesses and projects that rely on high leverage and have poor profitability to secure financing, encouraging a shift of funds from low-efficiency sectors to more competitive and potentially higher-growth industries and enterprises, thus optimizing and adjusting the economic structure. For example, in a high-interest-rate environment, some technology-driven enterprises with good growth prospects and profit expectations find it easier to secure funds, while some traditional, over-capacity industries face tighter funding situations, forcing them to upgrade or eliminate obsolete capacity, assisting the US economy in achieving a healthier and more sustainable transition.
III. The Impact of US Interest Rate Policies on the US Economy
3.1 Impact on the Real Economy
3.1.1 Consumption and Investment
Rate hikes have significantly increased borrowing costs, suppressing consumption and investment within the US. For example, in the real estate market, the sharp rise in mortgage rates has greatly increased repayment pressure for homebuyers, causing many potential buyers to hesitate, leading to a slowdown in real estate transactions. Data shows that since the start of the rate hike cycle, sales of newly built homes in the US have continuously declined, and investment enthusiasm in real estate-related enterprises has also been severely impacted, with a noticeable reduction in the number of new projects started. In the consumer sector, apart from real estate, consumption of big-ticket durable goods such as automobiles has similarly been affected. Consumers in a high-interest-rate environment tend to favor saving over borrowing for consumption, posing certain challenges to the US's consumption-driven economic growth model.
3.1.2 Labor Market
Although rate hikes aim to curb economic overheating, the US job market showed a degree of resilience in the initial stages of the rate hike. Demand for labor remained even as the economy had not yet shown clear signs of recession, while previous economic stimulus policies by the US government supported employment to some extent. However, as rate hikes continue, their negative effects gradually become evident. Some businesses, facing rising operational costs and squeezed profit margins, begin to cut hiring plans or even lay off employees. Particularly in interest-sensitive sectors such as manufacturing and construction, job losses are more pronounced. However, the structure of the US labor market is complex, with some sectors like services being relatively less affected by rate hikes, which helps to buffer the downward pressure on the job market.
3.2 Impact on Financial Markets
3.2.1 Stock Market
The impact of US interest rate hikes on the stock market is quite complex. On one hand, rate hikes increase the cost of corporate financing and lower profit expectations, negatively affecting stock valuations and causing stock prices to fall. This is particularly true for high-growth, high-valuation tech stocks, as their future cash flow discount values are more severely impacted by rising interest rates, leading to greater stock price volatility. On the other hand, after rate hikes, the yields on US dollar assets increase, attracting funds to flow out of the stock market to bonds and other fixed-income assets, putting further pressure on the stock market's liquidity. However, in actual market operations, the stock market is also influenced by various factors such as corporate earnings, economic growth expectations, and market sentiment. In certain phases, despite being in a rate hike cycle, if corporate earnings exceed expectations or the market is relatively optimistic about economic prospects, the stock market may still experience temporary rebounds.
3.2.2 Bond Market
The bond market is closely related to interest rate changes. When interest rates rise, the coupon rate of newly issued bonds will increase accordingly to attract investors. However, for already issued bonds, their fixed coupon rates become less attractive compared to new bonds, leading to a decline in market prices and potential capital losses for bond investors. Additionally, interest rate hikes may also trigger increased volatility in the bond market. As uncertainty about interest rate trends grows, investors may become more cautious in their risk assessments of bonds, potentially decreasing market trading activity. However, for some long-term investors, the increase in bond yields after rate hikes may provide opportunities for higher future returns, provided they can withstand the risks associated with short-term bond price fluctuations.
IV. The Impact of US Interest Rate Policies on the Global Economy
4.1 Emerging Markets and Developing Economies Face Enormous Pressure
4.1.1 Capital Outflow and Currency Depreciation
After the US rate hikes, yields on dollar assets increased, attracting global funds back to the US. The financial markets of emerging markets and developing economies are relatively fragile, and the massive outflow of funds has led to tight liquidity in their domestic capital markets, causing prices of assets such as stocks and bonds to fall. Simultaneously, to retain funds domestically, these countries have to raise their own interest rates, further increasing the financing costs for businesses and governments. Under the pressure of capital outflows, currencies in emerging market countries have depreciated. For instance, during this round of rate hikes, currencies like the Turkish lira and Argentine peso saw significant declines against the dollar, and currency depreciation further exacerbated inflationary pressures, leading these countries' economies into distress, facing multiple risks like inflation and debt defaults.
4.1.2 Increased Debt Risk
Many emerging markets and developing economies have accumulated significant dollar-denominated debt over the course of their economic development. US rate hikes lead to a stronger dollar, significantly increasing the debt burden for these countries, as they need to pay more in local currency to service their debts. When debt pressures exceed these countries' capacity, it may trigger risks of debt default. If defaults occur, it can not only have a devastating impact on the financial stability and economic development of the country itself but can also trigger panic in global financial markets through transmission mechanisms, obstructing global economic recovery.
4.2 Spillover Effects on the Economies of Other Developed Countries
4.2.1 Trade and Exchange Rate Aspects
As the world's largest economy and a major importer, changes in the US economy triggered by interest rate hikes have significant implications for trade with other developed countries. Rate hikes strengthen the dollar, causing other developed countries' currencies to depreciate, which somewhat benefits their exports but also raises import costs. For example, in Europe, while the depreciation of the euro improves the price competitiveness of European goods in international markets, many European countries rely on imports of energy and other commodities, which are often priced in dollars. The appreciation of the dollar leads to a sharp rise in energy import costs for Europe, exacerbating inflation pressures and squeezing profit margins for businesses, disrupting the recovery process of the European economy. Furthermore, significant fluctuations in exchange rates increase the uncertainty of international trade, affecting long-term investment decisions and global supply chain arrangements for businesses.
4.2.2 Impact of Financial Market Interlinkages
Global financial markets are closely interconnected, and the market fluctuations triggered by US interest rate hikes can transmit through various channels to other developed countries. On one hand, the turbulence in the US stock and bond markets affects the risk appetite of international investors, leading to a reallocation of funds in global financial markets and triggering fluctuations in financial markets of other countries. For example, a decline in the US stock market may induce panic among global investors, prompting them to sell off stock assets in other countries, causing those markets to decline as well. On the other hand, the transmission effect of interest rates puts upward pressure on interest rate levels in other developed countries, even if their central banks do not actively raise rates, market interest rates may rise passively due to US rate hikes, increasing financing costs for businesses and households, and constraining economic growth.
V. Predictions on the Future Direction of US Interest Rate Policies
5.1 Analysis Based on Domestic Economic Data in the US
The future direction of US interest rate policies largely depends on the performance of domestic economic data. If US inflation can consistently stabilize and approach the Federal Reserve's target of 2% while the job market remains stable and there are no significant signs of economic downturn, the Federal Reserve may maintain current interest rates for some time, observing the lagged effects of previous rate hikes before deciding on potential rate cuts. Conversely, if inflation rebounds or the job market deteriorates significantly leading to a sharp rise in unemployment, with serious recession risks looming, the Federal Reserve may end the rate hike cycle prematurely and shift towards rate cuts to stimulate economic recovery. For example, if US CPI data remains above expectations in the coming months and unemployment begins to rise, this may prompt the Federal Reserve to reassess monetary policy and accelerate adjustments to interest rates.
5.2 Constraints of Global Economic Conditions on US Interest Rate Policies
In the context of economic globalization, global economic conditions also place certain constraints on US interest rate policies. If emerging markets and developing economies fall into severe economic crises due to US rate hikes, leading to widespread debt defaults and financial market collapses, it will inevitably have negative impacts on the US economy. American multinational corporations will suffer losses from their investments and businesses in these regions, and the contraction of global trade will also affect US exports. Moreover, instability in other developed countries' economies can transmit to the US through trade and financial channels. Therefore, when formulating interest rate policies, the Federal Reserve needs to consider global economic conditions comprehensively to avoid excessively raising rates that could inflict devastating blows on the global economy, ultimately harming US economic interests.
5.3 Possible Policy Adjustments and Potential Pathways
The future of US monetary policy presents various possibilities for adjustment. One possibility is to maintain the current high interest rate levels for some time, known as the 'higher for longer' strategy, to ensure that inflation is thoroughly controlled. In this case, the Federal Reserve may use open market operations to maintain stable liquidity in the money market while strengthening supervision of financial institutions to prevent potential financial risks in a high-interest-rate environment. Another possibility is to gradually begin rate cuts at the appropriate time, but the pace of cuts will be slow and cautious. The Federal Reserve may lower interest rates in small, incremental steps based on changes in economic data, avoiding excessive shocks to the market. Additionally, the Federal Reserve may combine other monetary policy tools, such as adjustments to quantitative easing and forward guidance, to complement the implementation of interest rate policies in order to achieve multiple objectives of economic growth, price stability, and full employment.
VI. Conclusion
The US interest rate policy, as a key tool for macroeconomic regulation, has multiple motivations in a complex economic context. This policy has profoundly impacted the real economy and financial markets within the US while also delivering significant shocks to the global economy, particularly emerging markets and developing economies, through the transmission mechanisms of the global economic and financial system. Looking ahead, the trajectory of US interest rate policy is fraught with uncertainty and will be constrained by various factors, including domestic economic data and global economic conditions. For countries around the world, closely monitoring the dynamics of US interest rate policy and preparing policy responses and risk prevention measures in advance is crucial. Countries should enhance coordination of macroeconomic policies to jointly address the external shocks brought about by adjustments in US monetary policy, thereby maintaining stability and sustainable development in the global economy and finance. In today's world of deepening economic interdependence, no country's economic policy operates in isolation, and only through cooperation can we achieve win-win outcomes amid a complex and ever-changing economic environment.
