The US Fed-global financial markets shadow dance

While the US has again indicated it could raise interest rates, rattling the financial markets, it is worth asking for how long this game will continue, and what role China plays in it


The US Federal Reserve has indicated that it could raise interest rates as early as June. Photo: Reuters
The US Federal Reserve has indicated that it could raise interest rates as early as June. Photo: Reuters

For some time now, there has been an interesting game between the US Federal Reserve on the one hand and global financial markets on the other—more an intricate shadow dance rather than a direct confrontation.

This is how it goes. The Fed indicates through the minutes of its monetary policy committee that it is keen on raising interest rates. The markets immediately fall in panic. Fears that China will get slammed by massive capital outflows create selling pressure in all risk assets. The emerging markets feel the heat. The Fed then steps back because of worries about global financial instability that could eventually hit the US. Calm returns—till the Fed once again begins sending hawkish signals.

This shadow dance has been on for more than a year now. The US has once again indicated that it could raise interest rates as early as June. The financial markets have been rattled. It is worth asking for how long this game will continue. And what role China plays in it.

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