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The Challenge of Monetary Tightening

The US Federal Reserve’s latest interest-rate hike is just one more step on the long and difficult road away from quantitative easing. While the Fed and other central banks, such as the Bank of Japan, must complete the journey, governments must refrain from politicizing the pitfalls that await.

TOKYO – When it was announced on September 13 that the consumer price index – a key measure of inflation – in the United States had increased more than expected in August, stock prices plunged and the US dollar appreciated sharply. Markets knew that this would spur the US Federal Reserve to announce another significant interest-rate hike. And that is exactly what happened. But the pain of monetary tightening is just beginning.

The Fed is not alone in raising interest rates. Soaring inflation – which has reached double digits in the European Union and the United Kingdom – has spurred the European Central Bank and the Bank of England to do the same, though many economists still accuse all three monetary authorities of being behind the curve.

Central banks in Indonesia, South Korea, and Thailand also raised their policy rates by 25 basis points, and the Philippine central bank by 50 basis points, in August. Inflation stood at 7.9% in Thailand, 6.3% in the Philippines, 5.7% in South Korea, and 4.7% in Indonesia the same month.

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