The Fed’s dramatic interest-rate hikes have had dire implications for debt sustainability in the developing world. But the collapse of Silicon Valley Bank could lead to a rebalancing of monetary policy and, ultimately, a weaker US currency, which would go a long way toward easing financial conditions in low-income countries.
CAIRO – The US Federal Reserve’s decision to raise interest rates by 475 basis points over the course of 12 months, in a bid to curb inflation, was bound to be perilous. As should have been expected, it precipitated a dramatic shift in yield curves and exposed vulnerable financial institutions to interest-rate risks.
The collapse of Silicon Valley Bank (SVB), which was particularly exposed, with around 94% of its deposits uninsured, revealed the threat posed by the Fed’s strategy. But it also highlighted another major tension in the Fed’s monetary-tightening campaign, one of the most aggressive it has waged since the Volcker era: the trade-off between price stability and financial stability.
For months, the Fed’s dramatic rate increases elicited two primary concerns: how to bring inflation to heel without causing a recession, and the implications for fiscal and debt sustainability in emerging-market and developing economies (EMDEs), which are always among the first victims when major central banks tighten monetary policy.
To continue reading, register now.
Subscribe now for unlimited access to everything PS has to offer.
Subscribe
As a registered user, you can enjoy more PS content every month – for free.
Register
Already have an account?
Log in
CAIRO – The US Federal Reserve’s decision to raise interest rates by 475 basis points over the course of 12 months, in a bid to curb inflation, was bound to be perilous. As should have been expected, it precipitated a dramatic shift in yield curves and exposed vulnerable financial institutions to interest-rate risks.
The collapse of Silicon Valley Bank (SVB), which was particularly exposed, with around 94% of its deposits uninsured, revealed the threat posed by the Fed’s strategy. But it also highlighted another major tension in the Fed’s monetary-tightening campaign, one of the most aggressive it has waged since the Volcker era: the trade-off between price stability and financial stability.
For months, the Fed’s dramatic rate increases elicited two primary concerns: how to bring inflation to heel without causing a recession, and the implications for fiscal and debt sustainability in emerging-market and developing economies (EMDEs), which are always among the first victims when major central banks tighten monetary policy.
To continue reading, register now.
Subscribe now for unlimited access to everything PS has to offer.
Subscribe
As a registered user, you can enjoy more PS content every month – for free.
Register
Already have an account? Log in