US Fed’s tightening may undermine world economy

The US interest-rate hike cycle may last longer than expected, underscoring the need for China to hedge against external headwinds by boosting domestic demand while keeping cross-border capital flows stable, experts said on Thursday.
They commented as the Federal Reserve on Wednesday delivered a third straight 75 basis point rate hike to beat inflation, raising interest rates to a new target range of 3 percent to 3.25 percent.

More outsized rate hikes are in the pipeline as Fed policymakers forecast the federal funds rate to rise to 4.4 percent by the end of the year, significantly higher than the 3.4 percent forecast in June.

The rate hike cycle could also last longer than expected. Fed policymakers expect the federal funds rate to be 4.6 percent by the end of next year and 3.9 percent by the end of 2024, suggesting rate cuts may not come before 2024, contrary to expectations that the Fed could start cutting interest rates next year.

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Officials and pundits warned that the Fed’s stronger and longer-than-expected rate-hike cycle could undermine the global economy by raising economic recession risks, deflating non-dollar currencies and causing capital outflows from many emerging markets, while threatening their debt sustainability.

Foreign Ministry spokesman Zhao Lijian said at a news briefing Thursday that the Fed’s aggressive rate hikes have exposed many developing countries to the effects of currency depreciation, capital outflows and mounting debt burdens, putting additional pressure on the global economy.

As the US dollar index hit a two-decade high, the onshore renminbi exchange rate against the dollar weakened to 7.09 on Thursday, down from Wednesday’s close of 7.0535.

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Chinese stocks were slightly lower on Thursday, with the benchmark Shanghai Composite Index slipping 0.27 percent to close at 3,108.91 points.

Experts say China will be able to weather headwinds from Fed tightening thanks to a huge domestic market and its currency’s more flexible exchange rate, but the need to boost economic growth and stabilize FX market expectations has increased.

“Only when domestic economic growth prospects improve can cross-border financial risks be effectively averted,” said Luo Zhiheng, chief economist at Yuekai Securities.

Luo said it makes sense for the nation to cushion global downward pressures by making good use of tax breaks for manufacturers, cutting financing costs, accelerating infrastructure investment and pushing ahead with market-oriented reforms to boost business confidence.

As part of China’s ramped-up effort to expand investment, the People’s Bank of China, the country’s central bank, announced on Wednesday that it has drawn up a “white list” of infrastructure projects to ease its debt financing, whose outstanding loans topped 650 billion have yuan (91.9 billion US dollars).

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Cheng Shi, chief economist at ICBC International, said the impact of the Fed’s rate hikes on China’s real economy is likely to be limited as the country still has ample policy space thanks to its benign inflation level.

Still, the central bank may become more cautious about cutting benchmark interest rates and banks’ required reserves in the rest of the year as a balance needs to be struck between growth stabilization goals and foreign exchange market stability, Cheng said.
Source: China Daily

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