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Reasons for raising interest rates by the US Federal Reserve


The issue started during the spread of the coronavirus pandemic, as the United States injected liquidity into the market of nearly a trillion US dollars’ worth. It was aimed to encourage consumption and activate the market.

However, this action led to a large excess of liquidity in the market. After the end of the coronavirus crisis, the world supply chains were affected and the goods that could reach the US market and other global markets were few, leading to a situation where a lot of liquidity was chasing few goods.

Likewise, the Russian-Ukrainian war deepened the crisis further due to the rise in energy prices, which led to a rise in inflation in America and the world at large. Since the continued rise in the inflation rate was going to lead to the collapse of the US economy, the US central bank was forced to intervene to control and curb inflation by raising the interest rate to 4.75%.

The Federal Reserve continued raising the rate of interest and recently it has been raised by almost 25% to reach 5% for the US bonds is 5%.

What is the economic impact of raising interest rates on the US market and emerging markets?

The raising of interest rates led to the withdrawal of liquidity from the market, as individuals, companies, institutions, and investment funds tended to direct liquidity towards investing in the US government bond market.

Thus, liquidity was withdrawn from the US market, but not to the required level which existed before the interest rate hike at the beginning of the year.

On the other hand, this action deepened the crisis for the banks which had invested earlier in US bonds.

Those banks incurred losses due to being forced to sell the bonds they held for a price less than the interest rate in order to pay the claiming depositors their money, which then led to the collapse of some American banks.

However, the Federal Reserve is still continuing to raise interest rates until now and believes that it is not yet time to stop raising interest rates and lowering their rate again, because this may negatively affect other banks.

With regard to emerging markets, they depend on foreign investment funds to invest in local government bonds and as such support most of the emerging economies.

These investment funds also lend the governments of emerging countries to activate their economies and markets, but the raising of interest rates by the federal reserve has led to these investment funds withdrawing their money from emerging markets and transferring it to US markets, to be invested in government bonds due to their almost non-existent risk compared to the higher risk in emerging markets.

This led to the scarcity of the dollar in emerging markets and the collapse of the currencies of those countries against the dollar.

Consequently, many countries failed to pay their debts or tried to pay at the expense of their economies.

As expected, the gravely affected classes by the high prices of goods and services were the poor and the middle classes of society. The declining value of local currencies made it difficult for those countries to obtain the financing required to support their economies and to provide a good investment environment.

The high-interest rate in the US led countries with emerging economies to raise their interest rates, which in turn led to an increase in the cost of lending to local companies.

This was consequently reflected in the rise in prices in the local markets, with a direct impact on the poor and middle classes.

Egypt is one of the countries that was greatly affected when investment funds withdrew their money from the Egyptian market, which led to the accumulation of goods in the Egyptian ports due to the scarcity of the dollar in Egyptian banks.

The Egyptian banks were unable to fulfil the necessary documentary credits and the transfer of dollars to external sources. This led to scarcity and an incredible rise of goods in the Egyptian market, and the value of the Egyptian pound decreased drastically.

The recent interest rate hike may exacerbate the suffering of Egypt and emerging countries and put a lot of pressure on the economies and citizens in those countries.

In conclusion, in order to avoid such crises, it is necessary to strengthen the national industries, and it is necessary to create an environment for internal investment, enhance the role of small and medium-sized enterprises in the economy, and support the innovator and everyone who has a project that supports the national economy, as this may at least help to stabilise the market.

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