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Fed Rates Will Damage Emerging Markets?

|Includes: iShares MSCI Emerging Markets ETF (EEM)

FED rates increase.

Emerging markets effects.

Trump against Fed.

Analyzing the past trend of Fed rates we can see that they have been increased in the last year by + 0.25%, this gradual increase is due to preserve and follow the American economic growth.On Wednesday, the Fed will re-rate rates. As we can see from the table below, the average inflation has increased significantly over the last 2 years (2016-2018), probably the increase was from the particularly low rates. On Wednesday, the Fed could propose an increase in rates of a further + 0.25% to contain the strong inflationary increase. The Fed also in contrast to Trump could see this increase as a strengthening of its independence from the president , who say (Trump)  that the rate hike is insane and is totally against the protectionist policy adopted until now.

historical inflation rates (percent), us inflaction rates in

What happens if the rates increase?

In view of the above the first consequence could be a tension between politics and the Fed.At a macroeconomic level, an increase in rates could be reflected in emerging markets and in particular with a dollar strengthening and a depreciation of the local currency. In fact, the increase in rates is generally positive for the currency (in this case the US Dollar), so the strengthening could have effects on emerging countries also on debt, in fact many companies in these countries taking advantage of low rates in recent years,  have been indebted in dollars with the idea of repaying the loan by strengthening the local currency against the dollar. The difficulty in repaying debts could lead to a lower credit rating increasing the cost of credit obtained both for companies and for entire States.Emerging countries have also seen  an increase in investments in the bond market, due to the fact that they were the only ones with high yields and therefore attracting investors looking for higher rates than USA, but an increase in rates could lead to a shift of capital from emerging markets to the American market.

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