The US Federal Reserve Board dropped a bombshell last week when its boss warned of further interest hikes in the coming months to ward off inflation.
Fed boss Jerome Powell, in his speech to global finance chiefs, told his audience the US central bank in no uncertain terms would bring down the inflation rate from four-decade highs—even at the expense of economic growth.
Mr. Powell’s statement sent Wall Street and the rest of the global stock markets plunging. His statement is an indirect admission that recent interest rate hikes were not enough to cool down inflation.
By resorting to raising the cost of borrowings through rate hikes, the Federal Reserve is fighting the inflation menace in a battle that, in the words of Mr. Powell, will be painful for American families and businesses.
Increasing the interest rates to curb spending and deter business expansion can potentially lead to fewer job hirings and recession in the world’s biggest economy.
Stock market investors fear this scenario. An economic recession translates into reduced consumer spending and lower sales.
Investors dump their stock holdings on the prospect of lower returns and seek other investment alternatives that offer higher yields.
Mr. Powell’s speech unnerved the global financial markets.
The Fed boss made it clear that the fight against inflation will be a long battle. Restoring price stability, he says, will take some time and require using our tools forcefully to bring demand and supply into better balance.
That means US interest rates, which every financial market in the world monitors, will double toward the start of 2023 until inflation is tamed.
For the Philippines, higher US interest rates will weigh down the peso and complicate Manila’s own fight against inflation.
Foreign currency investors will naturally gravitate to high-yielding US Treasury bills and other dollar-based investment instruments.
The peso as a result will depreciate and make the cost of Philippine imports, including crude oil, more expensive.
The Philippine economy faces these headwinds.
It cannot totally decouple itself from developments in the US economy. As many will say, when America sneezes, the world catches a cold.