The U.S. Federal Reserve is watching the turmoil that the strong dollar is causing in emerging markets, but still will continue to raise interest rates in its struggle to control inflation, Fed vice-chair Lael Brainard said at a Fed-sponsored conference last week.

The central bank understands that rising interest rates around the world, led by the Fed, are pushing emerging nations toward financial instability and possible default, Brainard acknowledged.

“As monetary policy tightens globally to combat high inflation, it is important to consider how cross-border spillovers and spillbacks might interact with financial vulnerabilities,” she said.

The central bank has a special concern for the impact of higher interest rates on highly leveraged countries and companies, the Financial Times noted.

As rates rise, it becomes increasingly difficult for emerging nations in particular, which often are burdened by high debt loads, to keep up payments on their loans.

Those debts typically are denominated in dollars.

The Fed is “attentive” to those vulnerabilities and aware that they “could be exacerbated by the advent of additional adverse shocks,” Brainard said.

Equity markets in emerging nations have plummeted 29 percent in dollar terms this year, teeing them up for their worst annual showing since 2008 in the pit of the Great Recession, according to MSCI data.

Currencies of those countries have collectively lost 8.4 percent against the dollar so far this year, MSCI reported.

The further those currencies fall, the harder it becomes for the nations to buy enough dollars to pay their debts, as we have noted in “Investors Flee Emerging Nations’ Bonds As Default Prospects Rise” (31 May 2022), “Strong Dollar Batters Emerging Nations’ Currencies” (5 July 2022) and “Emerging Nations Diving Into Debt Default” (12 Jul 2022), among other articles.

TREND FORECAST: Five nations—Egypt, Ghana, Sri Lanka, Tunisia, and Zambia—already have defaulted on their debt, examples of our Top 2022 Trend of Dragflation, in which prices rise and economic output shrinks. These five are only the beginning.

As many as a dozen more nations will default as the central banks of leading economies steadily raise interest rates in a Hail Mary attempt to reverse inflation.

Those countries will turn to the International Monetary Fund (IMF) for help, as they always do.

However, the IMF already has loaned more this year than ever before, as we report in “IMF Lends Record Amount With More To Come” in this issue.

Although the fund’s books show it has as much as $750 million to lend, the IMF will want to squeeze every drop of concessions from the debtor nations it aids.

In return for what help it can give, the IMF will once again demand bankrupt nations adopt stringent financial reforms and controls. 

As has often happened before, those mandated controls will send people into the streets to protest, creating social and political instability, as we have detailed in our New World Disorder Top Trend.

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