The Fed’s interest rate hike has put an end to the era of super-cheap money in the USA. For other countries including Russia, this means tougher competition for foreign loans and investments. A lot has been said about the Fed’s money printing within the scope of QE as well as about low interest rates. The Federal Reserve ended QE more than 12 months ago. However, the decision to start raising the interest rates was a truly major event for the international community. The decision to raise the interest rate for the first time in 9 years was made on December 16, 2015.
Still some experts believe that financial markets have already taken this event into account which is why it is not going to have considerable impact on them, especially as the interest rate hike was just 0,25%. However, this event is important because it started a new era without super-cheap money, which is going to have long-term effect on the global financial system, especially if the Fed implements some other rate hikes in 2016. At the same time, this event started the process of balancing money-and-credit policies in the USA, which owns the world's major reserve currency and biggest economy. That is why the Fed's interest rate hike is an event of international significance. This decision is definitely going to affect all major developed and emerging economies, including Russia. Apparently, Janet Yellen and her colleagues are perfectly aware of the fact. However, they are used to being guided by national interests first. Basically, that's why the Fed started cutting the rates in 2007 and 2008 to hinder the housing crisis and avoid a major crisis through cheaper money pumped into the national economy.
The cheep money was expected to let American banks expand the lending on more favorable terms and conditions for retail customers and major companies in order to back the fragile economic growth in the USA at that time. However, the cheap dollars printed for the USA and lent at low interest rates started fleeing the country and spreading all around the globe through investing in emerging economies – their high-yield stocks and bonds – as well as exchanging them for currencies with higher interest rates or just investing in foreign businesses. That is why emerging economies were among those who benefited from those cheap dollars most of all. The list includes China, Brazil, Russia, Turkey and other economies. However, now the cash flow is definitely going to reverse and go back to the USA since American bonds and stocks are now regaining their investment attractiveness once again. For those emerging economies, this is going to be a tough game resulting in devaluation of their currencies, stocks, bonds as well as more expensive loans and significantly lower foreign investments. Still, this is not going to happen in an instance. It will take years to feel the impact of the Fed’s interest rate hike, which is probably not going to be the only one over the next few years. For now, international experts are predicting at least 2 more hikes in 2016. The Fed is aware of the negative consequences for the entire world, which is why Janet Yellen and Co hesitated all that time before making this crucial decision. They say the Fed was going to implement the decision 2 months ago, however Janet Yellen aborted he decision at the last minute due to poor economic data coming from China. At that time the Fed decided to wait for the sake of American businesses closely associated with China. However, they couldn’t delay the hike forever because this could have undermined the Fed’s image in the eyes of the international financial, trading and investment community. On top of that, no economy can exist in an artificial environment of super-cheap money forever since this brings a lot of soap bubbles in housing, stock and commodity markets.
That is why the Fed eventually decided to raise the interest rate for the first time in 9 years amid a pretty strong year for the USA its currency, labor and stock markets. A new cycle has begun. It will bring more expensive loans and higher bond yields. By the way, U.S. bonds are treated as the world’s most reliable investment assets.
For the rest of the globe, this means that the U.S. Dollar is going to get stronger and dollar loans are going to be less affordable and abundant. Without any doubt this means tougher competition since dollar investments in emerging markets are going to become scantier and wiser. Nobody is going to be an investment spendthrift from now on.
