Well, as a fundamental analyst at OverTraders.com, my entire professional mind and heart is bent towards the data, the evidence, the cold, hard facts. This is a hard discipline that demands absolute dispassion. It challenges us to improve every day to experience the world as it really is, rather than how we hope it is. In short, the data shows that there have been serious flaws in the Federal Reserve’s recent monetary policy decisions. Why is this dangerous? This trend is particularly worrisome for the developing world.
The usual headspace gets consumed by down debating what raising or lowering the interest rate means for the country. These amendments affect inflation, employment and GDP targets. The unintended consequences of these decisions reach well beyond U.S. shores, with developing economies paying a huge price. As someone who has seen this up close and personal, having watched first hand the dainty steps of capital flight and the subsequent increase in global investor nervousness.
The core issue is this: when the Fed raises interest rates, it strengthens the U.S. dollar and incentivizes global investors to seek higher returns in the perceived safety of U.S. assets. This perverse dynamic can set off a chain reaction of harmful effects for EMs. These countries are heavily reliant on private, foreign investment to create the economic opportunities they need to grow. A sudden reversal of capital flows can rapidly toss their economies into turmoil.
I know that this often fails. A modestly stated rate increase in Washington, D.C. can set off earthquake-like repercussions around the world. It may mean a currency crisis in Jakarta, a debt default in Buenos Aires, or a sudden stop in economic activity in Lagos. These are not academic hypotheticals — these are everyday-life realities with deep human impacts.
Arguably the most pressing issue for emerging market economies is their massive dollar-denominated debt. This makes a stronger dollar especially painful, as it significantly raises the cost of servicing these debts. This transition takes away precious dollars in more productive investments in infrastructure, education, and healthcare. This is a vicious cycle, as higher debt burdens only serve to further erode investor confidence, prompting even more capital outflows.
Similarly, the inverse relationship between increasing U.S. interest rates, an appreciating dollar and turmoil in developing economies has, historically, been well established. Past performance is not always a predictor of future results, but the basic economic realities have not changed. The backdrop of extremes in global debt and an undeniable return of inflationary pressures only add to this risk.
It’s not only an economic concern, either. The Fed’s policies larger climate justice concerns emerge from global climate equity. Rich countries—including the U.S. and Western European countries—are locking down access to sustainable, reliable energy. Higher interest rates can motivate global investors to withdraw capital support from emerging markets. This results in the Global South being eternally deprived of energizing prosperity and prevents them from achieving a cleaner, more sustainable energy future. This deepens already inequitable inequalities and counteracts collective international action to solve the climate crisis.
Now, some might argue that emerging markets should simply adapt, implement sound economic policies, and become less reliant on foreign capital. While this is certainly a laudable long-term objective, that’s a big leap from the short-term reality. Most of these nations struggle with deep structural challenges—from institutions to corruption to political instability. These factors pose challenges for attracting long-term capital and can hinder the development of robust, resilient economies.
The rapidity and scale of U.S. monetary policy shifts is enough to outpace well-meaning attempts at reform. Emerging markets usually don’t have the policy levers and the fire power to swiftly float a plan to mitigate the fallout from abrupt capital flight.
Now, of course, there are some things that emerging markets can do to combat the risks. Additionally, Sandri et al. (2023) recommend using macroprudential regulations to dampen the impact of global financial shocks. Therefore, as Obstfeld and Gourinchas argue, avoiding fixed exchange rates can be a key defense when the outside world comes knocking. Second, diversifying their exports—something Kalemli-Özcan (2019) has noted—can help countries lower their dependence on U.S. demand. Creating policy credibility, underscored by Kalemli-Özcan and Unsal (2020), will help boost investor confidence. Careful balance sheet management, as noted by Aizenman et al. (2020), can help manage domestic lending spreads and credit conditions.
These measures, even if implemented right, aren’t the panacea. They need strong political will, effective implementation, and a supportive global environment. Without these conditions, emerging markets are left to the mercy of U.S. monetary policy whims.
Unsurprisingly, I observed foreign global investors retreating from the market as 10-year Treasury yields shot up. At this point, those yields have settled in at collecting 4.50%. If those yields were to spike back up to 5% or more, that would be more damaging to global hot money investors.
Speaking both as someone who has analyzed these scenarios and a fellow human, I’m not in the business of peddling half-baked solutions or simplistic pronouncements. The world is a complicated place and economic policy is almost never a zero-sum game. I don’t underestimate my responsibility to call attention to dangers. Yet besides serving on the council itself, I’ve been a leading advocate for stable and fair policies to govern it.
That’s why I encourage the Federal Reserve to think long and hard about the international consequences of its actions. After all, its stated charter is to foster stable prices and full employment in the United States. Simultaneously, it needs to accept its new role as the world’s economic leader. To turn a blind eye to the suffering of these emerging markets is morally reprehensible and indeed self-defeating. A free, open, stable and prosperous global economy is in everyone’s best interest—not just our friends, but the allies—including the United States. The Fed's tightrope walk requires a steady hand and a clear vision, one that extends beyond domestic concerns and recognizes the interconnectedness of the modern world.
