IMF Agrees Fed Rate Hike Need to be Gradual

Further interest rate hikes by the U.S. Federal Reserve should be gradual or they risk hurting already fragile emerging economies, where many companies borrow in dollars, the head of the International Monetary Fund said on Tuesday.

Christine Lagarde said a tightening in U.S. monetary policy, which started last month with the first rate hike in a decade, should be supported by “clear evidence” of inflation in the United States. She highlighted the negative implications for emerging economies.

“The key issue going forward will be the pace of normalisation. We agree that it should be gradual as announced, as stressed actually by the Fed, and based on clear evidence of firmer wage or price pressures,” she told a central banking conference in Paris.

Ebbing confidence in China’s policymaking has fuelled investors’ retreat from the slowing economy and other emerging markets, which had attracted hundreds of billions of dollars over the previous decade thanks to their superior returns over sluggish developed economies.

Lagarde said higher U.S. rates, combined with easing in the euro zone and Japan, could push up the dollar, making life harder for the many companies in emerging economies that borrow in dollars.

“For emerging economies, this could raise vulnerabilities in sectors with dollar exposures, especially corporates,” Lagarde said.

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza