The US Federal Reserve’s recent decision to raise interest rates to their highest level since 2007 reflects mounting concerns over inflationary pressures. The implications of this move on global markets, as well as the responses from other central banks, are being scrutinized.

LIMS indicated that this increase underscores the Federal Reserve’s commitment to curbing inflation. However, the task remains challenging, particularly in the face of the continuous increase in wages. The rise in interest rates presents its own set of challenges for banks, as it diminishes the value of their assets and amplifies borrowing costs. In the event of bank failures, authorities have demonstrated a clear commitment to liquidating banks while safeguarding deposits. The Fed believes in the ability of such a resolution to restrain contagion and halt the spread of a banking crises. However, this policy cannot shield the real economy from repercussions. LIMS foresees an impending economic slowdown as a consequence of escalated borrowing expenses. This development is expected to purge the market of businesses reliant solely on the availability of low-cost borrowing, thereby reallocating capital towards companies addressing more pressing demands. The prevailing market valuations appear overly optimistic, built upon unrealistic expectations of a decline in interest rates.

Addressing the risks of international de-dollarization, LIMS added that the US dollar continues to maintain its status as the primary reserve currency, with approximately 60% of international central bank reserves held in dollars. Despite some diversification away from the dollar, the overall impact on its global usage remains relatively limited. The interest rate hikes undertaken by the US demonstrate its ability to tackle inflation, albeit at the potential cost of economic recessions or banking crises. Such disciplined monetary policy, often rare in developing countries due to institutional weaknesses, can restore the appeal and attractiveness of the US dollar.

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