The US federal reserve interest rate increase and its global fallouts

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CWA # 746

The World This Week

The US federal reserve interest rate increase and its global fallouts

GP Team
19 June 2022

The World This Week #170, Vol. 4, No. 19

19 June 2022

Ankit Singh

The US: The Federal Reserve's interest rate increase and its global fallouts

What happened?
On 15 June, the Federal Reserve increased the much-awaited target interest rate to 1.75 per cent. The increase is the first step to restraining inflation, as the target for inflation is fixed at two per cent, while the average annual inflation for 2022 in the USA is 7.7 per cent. The change of rate stance in stimulating growth has shifted from neutral (~equilibrium- neither stimulates nor restrains growth) to a slowdown/ contractionary.

Brian Jacobsen at the Allspring Global Investments said: "The Fed is willing to let the unemployment rate rise and risk a recession as collateral damage to get inflation back down. This isn't a Volker-moment for Powell given the magnitude of the hike, but he is like a Mini-Me version of Volcker with this move."

What is the background?
First, the surging inflation. Inflation expectations are due to high brent crude, cooling in house market and challenges to supply chain management. Emerging economies and populist leaders have tended to look inward in recent times to deter the economic impact of lockdowns.

Second, invoking the Volker moment. In March 1980, as a federal reserve chair, Paul Volker faced a similar situation when inflation was an economic and political challenge for the nation. He increased the fed fund rate and escorted a hard landing of the economy at the cost of higher unemployment. The economy resumed its growth in 1982 with lower inflation at the cost of ever-increasing deficits in the current account of the US.

Third, the trends in emerging economies. Many advanced and middle-income economies have increased and kept their benchmark interest at a contractionary rate. Bank of England has hiked its interest rates fifth time since May 2022 as the country witnessed inflation soaring at 9 per cent. India also faces the situation of a tight labour market and the need for a slowdown from the demand side to counter the upside risk of inflation; the current policy interest rate is at 4.4 per cent.

What does it mean?
Economies are at a high systematic risk of protracted low growth. Given the gravity of the US Dollar in petrodollar, forex reserves and investment portfolios, the global financial impact will create a recession for emerging economies in the non-west region.

There will be a domino effect on housing, stock valuation, cryptocurrency, auto loans, credit cards, insurance and energy profiling. This slowdown in the US economy may spur avenues for more reliable energy sources like renewables. To continue with an interconnected yet fragmented world, there is the scope for enhanced transparency on troubled banks and data gaps.

There is a need to de-hyphenate from dependence on the dollar and explore measures not to let the slowdown in advanced economies impact emerging economies. Chinese digital Yuan is one such contender; on 17 March, Saudi Arabia has recently agreed to sell oil to China in Yuan. Regional currencies other than the dollar in trade is the way forward in the short term to mid-term to preserve the growth scenario-specific emerging economic geographies. Domestic mandates in various economies to rejuvenate an independent market niche can be a more peaceful way to emerge out of current geo-political turmoil in the world order transition.

The Chinese economy has been in a trade war with the US over threats to its economic vitality. Both sides recently have reduced the bar in tariff wars, but consensus on many trade and investment issues is nowhere in sight.

Also, in the news
By Avishka Ashok, Ashwin Dhanabalan, Akriti Sharma, Abigail Miriam Fernandes, Ankit Singh, Apoorva Sudhakar, Harini Madhusudan, Rishma Banerjee, Padmashree Anandhan

East and Southeast Asia This Week
China: 69 countries call for non-interference at the 50th session of the United Nations Human Rights Council
On 14 June, Cuba resealed a joint statement with 68 other countries and pledged to stay out of issues such as Xinjiang, Hong Kong, and Tibet, which they consider China's internal issues. The countries also opposed the politicization of human rights, double standards and interference in China's internal affairs. The statement was read at the 50th session of the UN Human Rights Council and said: "We maintain that all parties should abide by the purposes and principles of the Charter of the United Nations, adhere to the principles of universality, impartiality, objectivity and non-selectivity, and respect the right of the people of each state to choose the path for development independently in accordance with their national conditions." The 69 countries further called for multilateralism, strengthening solidarity and coordination and collectively responding to global challenges.

China: President Xi and President Putin extend support
On 15 June, China's President Xi Jinping and Russia's President Vladimir Putin held a phone conversation and reaffirmed their support for each other on issues related to security and sovereignty. President Xi spoke about the crisis in Eastern Europe and implored all parties to reach a proper settlement. The Kremlin also reported the call and said that Xi took note of Russia's efforts to protect its national interests in the face of global challenges. Xi also commented on the trade and economic relations with Russia in the first five months of 2022 and noted steady growth in cooperation. He said: "China is willing to work with the Russian side to promote the steady and long-term development of bilateral pragmatic cooperation. China is willing to, together with Russia, continue to support each other on issues concerning core interests and major concerns such as sovereignty and security."

Japan: Foreign Ministry lodges official complaint against China's unilateral development activity
On 17 June, Japan's Foreign Minister announced that the country had filed a protest with a senior official from the Chinese embassy in Tokyo after the Japanese navy discovered a new gas exploration platform being transported in the East China Sea. Japan called the action as "China's unilateral development of resources in the East China Sea", an area that was agreed for bilateral cooperation under a 2008 agreement. The statement by the Ministry said: "It is extremely regrettable that China is proceeding with its unilateral development activity, even though it is in the west side of the equidistance line between Japan and China."

North Korea: The US attempts to engage in diplomatic dialogue over nuclear issues
On 16 June, the US State Department Spokesperson Ned Price explained that North Korea remained unresponsive to the US efforts for a dialogue on nuclear issues. Price also reaffirmed the US commitment to push for diplomatic channels to resolve the possible threat to peace on the Korean Peninsula. He said: "You heard from Secretary (Antony) Blinken when he was standing next to his South Korean counterpart earlier this week that our approach is to make clear to the DPRK that we harbor no hostile intent. We seek diplomacy and dialogue in order to advance the prospects for the complete denuclearization of the Korean Peninsula." In the past week, the US has repeatedly urged North Korea to engage in dialogue while reiterating that the country holds no hostile intent.

Thailand: Foreign Ministry rejects speculations on joining NATO of Asia
On 17 June, Thailand's foreign ministry spokesperson Tanee Sangrat stated that Thailand had no intention of joining the "Nato 2" or the "Nato of Asia." He further mentioned that Bangkok only had bilateral cooperation with friendly countries regarding security matters. He expressed: "The rhetoric about a so-called Nato 2 is not based on truths." The rumours had caused issues for Thailand as China, Russia, and Iran perceived it to be tilting towards the US. Concerning the US Indo-Pacific strategy, he clarified that Washington prepared it with no agreement signed with any country.

Laos: Government sells bonds to tackle inflation
On 15 June, Laos announced to offer high-interest bonds worth USD 340 million with a six-month interest rate of 20 per cent. The economy of Laos has been struggling due to high inflation and lack of foreign reserves; this has also caused shortages of food and gas. The government has blamed the devaluation of the Lao Kip on black market moneychangers. However, the citizens of Laos are apprehensive of the government's bonds, as a 20 per cent rate over six months would be difficult for the central bank to honour.

ASEAN: India holds a special meeting with the foreign ministers of the alliance
On 17 June, India's external affairs minister, Dr S Jaishankar, met with the foreign ministers of Brunei, Indonesia, Malaysia, Singapore, Thailand, and Vietnam. He met the ministers on the sidelines of the special ASEAN-India foreign ministers' meeting. Jaishankar added: "A better-connected India and ASEAN would be well-positioned to promote decentralized globalization and resilient and reliable supply chains that are needed by the international community." The meeting adopted a 17-point statement focusing mainly on people-to-people exchanges, trade and investment growth, physical and digital connectivity, defence and security, climate action, and green growth.

South Asia This Week
Bangladesh and India: Floods impact millions of lives
On 18 June, floods hit Bangladesh and north-eastern India, impacting millions of people. Nine people died in Assam due to floods, twenty-five people died in Bangladesh due to lightning, and millions of houses were submerged in water. The Brahmaputra river breached its embankments, inundating 28 out of 33 districts. Both the countries have resorted to the military to manage the disaster as heavy rains are expected to continue for some days. Indian Army has been directed to help other disaster management agencies assist in rescue operations and providing food packets to the stranded population. In Bangladesh, the water levels have been continuously rising, and schools have been converted into relief shelters.

India: Protests against the government's "Agnipath" scheme
On 18 June, protestors continued to protest against the recently approved scheme by the Indian government to recruit armed forces known as "Agnipath". Protestors comprised political parties, farmer unions, trade unions, and youth organizations from regions that contribute majorly to the army recruitment, including UP, Bihar, J&K, Haryana, Uttarakhand, Himachal Pradesh, and Rajasthan. Protests turned violent in Bihar, where some police personnel was injured, and trains were halted. In Telangana, one protestor died in police firing at the Secunderabad station. Many people have been injured and railway property has been damaged during the protests calling for the rollback of the scheme, which will lead to "contractualisation of armed forces".

India: Increasing crude oil import from Russia
On 16 June, according to the data published by the Hindu, India imported five times higher crude oil in four months than it used to import in the last five years. It has become the sixth highest country to import Russian crude oil globally. China remains the highest importer, followed by the Netherlands, Italy, Turkey, and Germany. Earlier, India used to import its oil from UAE, Iraq, and Saudi Arabia with just one per cent oil from Russia.

Sri Lanka: Protests over windmill project undertaken by Adani group
On 13 June, the Ceylon Electricity Board chairman resigned after making a controversial statement regarding the influence of the Indian government to push for the Adani group to undertake the windmill project in Mannar. President Rajapaksa tweeted: "Re a statement made by the #lka CEB Chairman at a COPE committee hearing regarding the award of a Wind Power Project in Mannar, I categorically deny authorization to award this project to any specific person or entity. I trust responsible communication in this regard will follow." On 16 June, protestors from Gotagogama in Colombo held demonstrations and questioned the transparency of the project awarded to the Adani group. On the other hand, the Adani group spokesperson reported by the Indian Express said: "Our intent in investing in Sri Lanka is to address the needs of a valued neighbour. As a responsible corporate, we see this as a necessary part of the partnership that our two nations have always shared".

Sri Lanka: Schools and offices shut due to fuel crisis
On 17 June, Sri Lankan authorities announced a two-week shutdown of the government offices and schools due to an acute fuel shortage. The Public Administration Ministry said: "Due to scarce public transport as well as the inability to arrange private vehicles, it is decided to drastically curtail the number of employees reporting to work," Earlier, the authorities also declared Friday as a holiday to manage the fuel crisis. On 16 June, World Food Programme started distributing food packages to pregnant women as four out of every five people has started skipping at least one meal a day.

Nepal: Acute fertilizer shortage
On 13 June, main opposition party members from CPN-UML registered an emergency motion of public importance to demand discussions on the shortage of fertilizers in the country. Forty-eight lawmakers spoke regarding the issue and said that the Prime Minister has to take the issue into his hands as it has become a national issue. They also raised concerns regarding the recent budget, which aims at increasing 30 per cent productivity of cereals. However, due to the fertilizer crisis, it is impossible to achieve the target. Nepal has sought assistance from India regarding fertilizer supply as the sowing season is approaching, and it cannot internally manage the shortages as fertilizer plants take two years to get operationalized.

Afghanistan: International community's efforts have come to a deadlock, says Afghan envoy
On 13 June, the permanent envoy of Afghanistan to the UN in Geneva, Nasir A. Andisha, while speaking at the 50th Annual UN Human Rights Session, said: "Over the past ten months the international community is using every possible means to engage with the Taliban, but unfortunately it appears that all efforts are approaching a dead end, a cul-de-sac filled with broken promises and deep disappointments." Meanwhile, the participants discussed the state of the world's interactions with the Islamic Emirate, the "systematic exclusion of women from society," and the "deteriorating human rights situation" in Afghanistan during the session.

Pakistan: Envoy meets with President Biden; US Ambassador highlights endless possibilities to strengthen the economic partnership further
On 15 June, Dawn reported that Pakistan's ambassador to the US Masood Khan met with President Joe Biden in the White House. During the visit, the two sides discussed building a "strong basis for moving Pakistan-US ties forward." Meanwhile, on 15 June, US Ambassador to Pakistan Donald Blome, while addressing the Pakistan Stock Exchange (PSX), said that as the US and Pakistan commemorate 75 years of partnership this year, "I want our robust economic relationship to be front and centre. It is a relationship worth highlighting, and is bigger and more important than ever."

Pakistan and Iran: Foreign ministers meet
On 14 June, Foreign Minister Bilawal Bhutto Zardari met with Foreign Minister Hossein Amir Abdollahian during his two-day visit to Iran. Following the meeting, FM Bilawal said that both sides had come closer to resolving one of the major obstacles in the expansion of bilateral trade through operationalizing the barter trade mechanism, claiming, "This will greatly help in improving the livelihood and welfare of the people in the border areas." Additionally, he highlighted the need for formalization of cross-border exchanges by opening new border crossings.

Pakistan: FATF schedules on-site visit after Islamabad met all 34 items of the action plans
On 17 June, the Financial Action Task Force (FATF) President Dr Marcus Pleyer announced that Pakistan had met all 34 items on two separate action plans. He acknowledged the measures implemented by Pakistan, stating, "they are good for the stability and security of the country." However, he added, "Pakistan is not being removed from the grey list today. The country will be removed from the list if it successfully passes the on-site visit." The visit would verify the implementation and sustainability of Pakistan's money laundering and counter-terrorism financing measures before removing it from the watchdog's grey list.

Middle East and Africa This Week
Turkey: Erdogan to welcome Crown Prince MBS
On 17 June, following the Turkish president's visit to Saudi Arabia in April, Erdogan announced that Saudi Arabia's crown prince Mohammad Bin Salman would visit Turkey. Turkey, earlier in April, had transferred the trial case against 26 Saudi suspects for the murder of Jamal Khashoggi from Istanbul to Riyadh. Erdogan said while talking to reporters: "God willing we will have the opportunity to assess to what much higher level we can take Turkey-Saudi Arabia relations." With inflation reaching 73.5 per cent in May and a cost-of-living crisis a year before a presidential election, experts say Erdogan needs backing from Gulf countries.

Israel and Egypt: EU signs tripartite agreement on the export of gas
On 15 June, a tripartite agreement was signed between European Union, Israel and Egypt. The deal, finalized on Wednesday at the East Mediterranean regional energy conference in Cairo, will allow "significant" exports of Israeli gas to Europe for the first time, the Israeli energy ministry said. The signing of the memorandum of understanding in a five-star Cairo hotel comes a day after von der Leyen and Italian Prime Minister Mario Draghi embarked on energy talks with Israeli foreign minister Yair Lapid. Von der Leyen, European Commission chief, said on Twitter that the agreement would contribute to Europe's energy security.

Saudi Arabia: Biden confirms first visit the Middle East
On 14 June, the White House confirmed details of US President Joe Biden's first trip to the Middle East, including a controversial stop in Saudi Arabia and an expected meeting with Saudi Crown Prince Mohammed bin Salman (MBS). During his July visit, Biden is widely expected to try to secure a boost in Saudi oil production as his administration scrambles to tame spiralling fuel costs – spurred by the Russian invasion of Ukraine – and inflation at home that are projected to hurt his Democratic Party in the upcoming midterm congressional elections. Joe Biden will discuss means for expanding regional economic and security cooperation, including new and promising infrastructure and climate initiatives, as well as deterring threats from Iran, advancing human rights, and ensuring global energy and food security.

Iran: Greece releases seized oil tanker
On 14 June, Iran's Ports and Maritime Organisation (PMO) said an Iranian-flagged tanker seized in April has been freed by Greece. Its alleged release comes after a Greek court overturned an earlier ruling last week that allowed the confiscation by the United States of part of the tanker's Iranian oil cargo.

Tunisia: UGTT organizes countrywide strike as talks with IMF close in
On 16 June, the Tunisian General Labour Union (UGTT) held a countrywide strike of public sector employees to protest against president Kais Saeid's proposed wage cuts and rollback of subsidies. The strike by an estimated three million employees led to the cancellation of flights and restrictions on public transport. The strike was held against Tunisia's upcoming talks with the IMF, wherein the government aimed to secure a bailout plan. The government's proposal to the IMF includes a wage freeze on public sector workers, cuts in subsidies and restructuring of public companies.

DRC-Rwanda: Border closed after Congolese soldier shot dead in attack
On 17 June, a soldier from the Democratic Republic of the Congo was shot dead by Rwanda's police after he crossed into Rwanda and began shooting security forces and civilians. On the same day, Al Jazeera reported the DRC had closed its border with Rwanda. The development comes amid diplomatic tensions between the two countries, including the DRC High Council of Defence's request to the DRC government to suspend trade agreements with Rwanda on 15 June.

UK-Rwanda: European Court prevents the first batch of asylum seekers from being flown to Rwanda
On 14 June, the UK's first flight carrying asylum seekers to Rwanda was halted after the European Court of Human Rights granted last-minute injunctions to stop the deportations. A judicial review by the High Court in London is scheduled for July. Meanwhile, Home Secretary Priti Patel said the government should not be discouraged and maintained that she had always known the policy would face challenges but was surprised that the ECHR intervened despite successful decisions in domestic courts. Previously, on 13 June, the UK's Court of Appeal approved the High Court's decision to commence the deportation of the first batch of asylum seekers to Rwanda. On 17 June, The Guardian reported Rwanda's disappointment over the media's portrayal of the country. The government spokesperson said: "Much of the narrative about Rwanda that we are hearing in the media is frankly insulting" and mentioned Rwanda's achievements.

Europe and The Americas This Week
Russia: SPIEF amid the war
From 15-18 June 2022, the St Petersburg International Economic Forum, the annual event hosted by the Russian President, was conducted. The forum is dubbed the 'Russian Davos,' and it is where Russia-Global economic and trade development and investment policies are discussed within the structure of an economic forum. Though the majority of the Western countries have boycotted the event, the event went forward with representatives from the rest of the countries. The Primary guest of honour for 2022 was the Egyptian President, with Egypt as the guest country. The focus of this year is on the Asia-Pacific and Africa, and besides the discussions on the business initiatives, the Arctic as a territory of dialogue was emphasized on. This year marked the 25th year of the forum. Besides a sizeable number of corporate representatives, the representatives from the Eastern Ukrainian rebel areas, the Taliban-led government, and Belarusian leader Lukashenko were the highlights. According to the official statistics, this year bought together 13,500 participants from 141 countries and over 1000 media representatives from 46 countries.

Russia: Putin and Lavrov public statements during the week
On 16 June 2022, in an exclusive interview with the BBC, Russian Foreign Minister Sergei Lavrov stated that Russia "did not invade Ukraine. He said, "We declared a special military operation because we had absolutely no other way of explaining to the West that dragging Ukraine into Nato was a criminal act." This interview is one of the very few he has given to the western media since the beginning of the war. Lavrov reemphasized the official Russian stance that there were Nazis in Ukraine and claimed that their military, through the special military operations, is working towards 'de-Nazifying' the country.

On 17 June 2022, at the SPIEF Forum, Vladimir Putin made a speech and stated that the world is observing the end of "the era of the unipolar world." Putin continued to refer to the western world and their sanctions placed on Russia. He said, "When they won the Cold War, the US declared themselves God's own representatives on earth, people who have no responsibilities -- only interests. They have declared those interests sacred. Now it's one-way traffic, which makes the world unstable." There was a delay in his presence at the summit of over 90 minutes due to a cyberattack which was later reported to be by the Ukrainian IT Army. The speech by Putin is seen as an insight into his thinking after four months since the war began.

The UK: EU plans to impose legal actions over the post-Brexit trade deal
On 15 June, the EU announced legal action against the UK government over its unilateral amendment of the post-Brexit Northern Ireland protocol. The European Commission vice-president Maros Sefcovic reiterated that the UK's action was breaching international law. The EU will now reopen the infringement procedure it started against the UK in 2021 when the Boris administration extended a grace period for trade on the island of Ireland unilaterally. That action was put on hold in September 2021 as both sides attempted to reach an agreement. Furthermore, the EU will take additional action against Johnson's government for allegedly failing to carry out appropriate controls under EU laws and produce trade statistics data as required by the convention.

The EU: European Commission resumes its aid towards Palestine
On 14 June, the European Commission president Ursula von der Leyen announced to continue to aid Palestine by donating millions of Euros. The EU and other institutions have been donating about EUR 600 million a year until 2020. The EU froze its aid for Palestine over allegations that their textbooks promoted violence and anti-Semitism. The hold-up caused a financial crisis in the state, and the authorities were unable to pay salaries to teachers and doctors. The medical facilities were also forced to limit the number of admissions. Leyen, after visiting Ramallah, stated that the funds would be released rapidly, and EUR 25 million would be allotted to improve food security.

Arctic: Extraordinary warming in the Barents Sea
On 15 June, the Guardian examined a study published in the journal scientific reports, which revealed exceptional warming in the Barents Sea region of the Arctic. The warming is taking place in the North Barents Sea, where rapidly rising temperatures are thought to be causing more extreme weather in North America, Europe, and Asia. The warming in this area, according to scientists, is an "early warning" of what might transpire over the whole of the Arctic. According to the new data, annual average temperatures in the region are rising by up to 2.7 degrees Celsius every decade, with particularly large surges of up to 4 degrees Celsius per decade in the fall months. As a result, the North Barents Sea and its islands are the world's fastest-warming region.

Spain: A new type of marine pollutant was termed as plastitar
On 13 June, scientists of Canary Institute of Marine Sciences in Spain coined the term Plastitar for the new type of ocean pollutant. The formation of plastitar is a result of oil spills in the ocean, which, when evaporates and weathers, it washes ashore as tar balls that stick to the rocky shores. The structure solidifies over time, fusing anything from abandoned fishing equipment to plastic pellets and scraps of polyester and nylon to the tar. Plastitar was discovered along the shorelines of numerous Canary Islands; it was widespread, spanning more than half of the region they were investigating. The occurrence of plastitar was related to the archipelago's location along a major oil tanker shipping route, but the scientists believe it may exist worldwide.

The EU: European commission supports Ukraine's EU membership bid
On 17 June, the European Commission backed Ukraine's membership in the EU. This comes after European leaders like Italy's prime minister, Mario Draghi, France's president Emmanuel Macron and Germany's chancellor, Olaf Scholz visited Kyiv and said they support Ukraine's membership bid. European commission president, Ursula von der Leyen recommended candidate status for Moldova too. Georgia which had also applied for the same, during the same time, however, did not get the green signal from the commission. They said that Georgia needed to do further anti-corruption and judicial reforms. The leaders of EU countries are expected to vote about the impending candidature at a summit next week.

Bulgaria: Government faces no-confidence vote amidst political turmoil
On 15 June, a no-confidence has been initiated against Bulgaria's coalition government, as they face a political crisis. Members of the There is Such a People's Party (ITN), a part of the coalition government are resigning over the new budget revision and the government's lax stance on the veto to North Macedonia's EU bid. There has been discontent about the government's inability to control the surging inflation and rising costs. The coalition government consists of 4 parties occupying 134 out of 240 seats. But without the support of 26 ITN members, they will become the minority. While prime minister Kiril Petkov has said that they will continue with a minority government, the main opposition part, centre-right GERB has filed for a no-confidence motion. The vote is expected to take place next week.

About the Authors
Ankit Singh, Akriti Sharma and Harini Madhusudan are PhD Scholars in the School of Conflict and Security Studies at the National Institute of Advanced Studies. Avishka Ashok, Ashwin Dhanabalan, Abigail Miriam Fernandes, Apoorva Sudhakar, and Padmashree Anandhan are Research Associates at NIAS. Rishma Banerjee is a Research Assistant.

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The US federal reserve interest rate increase and its global fallouts

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