Best Of: How the Fed Is ‘Shaking the Entire System’

Rate Hikes

The recent interest rate hikes by the Federal Reserve have significant global repercussions. Adam Tooze explains that as the US raises rates, it becomes more attractive for foreign investors to hold American assets, leading to a stronger dollar and weaker currencies in other countries 1. This shift in currency valuations can destabilize economies that rely heavily on dollar-denominated debt. Tooze notes, "The questions about the Fed are really, how long are they going to continue this tightening cycle for?" 2. The comprehensive nature of this monetary tightening is unprecedented, with global fiscal policies also tightening simultaneously 3.

   

Debt Risks

Emerging markets face heightened risks due to their debt levels in a world of rising interest rates. Ezra Klein and Adam Tooze discuss how many of these debts were contracted under low interest rates, and the shift to higher rates poses sustainability challenges 4. The complexity of the current debt landscape is compounded by the involvement of multiple lenders, including private markets and Chinese entities, making debt restructuring difficult 5. Tooze highlights the historical impact of US interest rate hikes on emerging economies, noting, "The Fed has a mandate for the American economy. It does not have a mandate as a global hegemon" 6.

   

System Fragility

The global financial system's fragility is exacerbated by interconnected crises and rapid changes. Ezra Klein points out that unexpected shifts in financial markets can lead to crises due to the complexity and interdependencies within the system 7. Adam Tooze argues that these vulnerabilities are often due to conflicts of interest and inadequate regulation, rather than inherent complexity 8. He states, "We are reaching the point in the monetary tightening cycle in which things begin to break" 9. This highlights the precarious nature of current financial systems and the potential for unforeseen disruptions.