The Fed's policy spillover may accelerate the trend of global monetary tightening

Federal Reserve Chairman Jerome Powell said after being re-elected by Congress a few days ago that he would reduce inflation to the Fed's 2% target
"at all costs.
" He said frankly that the imbalance between supply and demand of labor in the United States and high inflation coexist, and the Fed's policy means are limited, and whether it can achieve a "soft landing" of the economy depends on many uncontrollable factors
.
Affected by inflation concerns and Powell's speech, the three major U.
S.
stock indexes fluctuated sharply last week, with weekly declines of more than 2%.

Analysts believe that the "fast" shift of US monetary policy from the "flood" type of easing policy since the new crown epidemic to aggressive tightening, which not only leads to an increase in the risk of recession in the United States, but also causes negative spillover effects, impacting global financial markets and exacerbating pressure
on emerging markets.
The global shift from monetary easing to monetary tightening is accelerating, which is likely to push up international borrowing costs and increase
the risk of liquidity shortages.

Emerging markets are bearing the brunt

In an effort to curb the worst inflation in 40 years, the U.
S.
Federal Reserve announced a 50 basis point rate hike earlier this month, the largest single rate hike since 2000, and plans to reduce its balance sheet by nearly $9 trillion from June 1
.

Experts said that the United States has entered a cycle of interest rate hikes, which has brought increasingly severe challenges to the capital markets, local currency exchange rates and monetary policies of developing countries and emerging market economies, and has also exposed them to more financial risks
.

Gabriela Siriel, economic and financial analyst at Bank of Mexico's Base Bank, said that in the context of the Fed's interest rate hike, many investors consider Mexico's free-floating exchange rate system, or choose the peso for speculation, which will increase the instability
of the peso exchange rate.

Ronnie Lins, an economist and director of the Brazilian Institute of China Studies, said that after the Fed raises interest rates, the United States can transfer the costs and costs of the crisis it faces through the inflow of international capital
.
At the same time, currencies in many emerging market economies could depreciate, affecting the recovery of the world economy
.

Jorge Marchini, an economics professor at the University of Buenos Aires in Argentina, warned that Latin American countries need to be vigilant about the Fed's interest rate hikes to avoid a repeat of the "lost decade" of the 80s
.
He believes that at that time, the Fed adopted similar interest rate hikes to curb inflation, which became the "fuse"
for Latin American countries to fall into economic crisis.

Global monetary policy is tightening

The Fed's rate hike not only underscores policymakers' sense of urgency to tackle inflation, but also pushes globally to accelerate the pace
of balance sheet reduction and end quantitative easing.

Oil transactions need to be settled in dollars, and the central banks of Gulf producers Saudi Arabia, the United Arab Emirates, Qatar and Bahrain raised their key interest rates by 50 basis points
after the Fed raised interest rates.
Mohammed Yusuf, a young Saudi economist, told reporters that Gulf countries are closely following the Fed's interest rate hikes to prevent capital from flowing back to the United States or into dollar-denominated investment projects
with higher yields.

On the 5th of this month, the Bank of England announced that it would raise its benchmark interest rate by 25 basis points to 1%, the fourth consecutive rate hike since December last year, raising interest rates to the highest level
since February 2009.

The Bank of Canada announced a 50 basis point rate hike in April, raising its benchmark rate to 1%.

The central bank also decided to start quantitative tightening from April 25 and reduce the size of its balance sheet to coincide with interest rate hikes and ease inflationary pressures
.

In Asia Pacific, the Bank of New Zealand announced in April that it would raise its benchmark interest rate by 50 basis points to 1.
5%.

This is the fourth consecutive rate hike by the RBNZ since October 2021 and the first single 50 basis point
hike since May 2000.
The RBI raised the repo rate, which is its benchmark rate, by 40 basis points to 4.
4% on May 4, marking the first rate hike in nearly four years
.

Bloomberg News' economics division estimates that G7 policymakers will shrink their balance sheets by about $410 billion
for the remainder of 2022.

As early as January, the International Monetary Fund warned major central banks to communicate clearly when tightening monetary policy and beware of spillover financial risks
to vulnerable emerging market and developing economies.