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Jay Powell’s statement that the US will experience pain from higher interest rates is even more applicable to the rest of the world. The US dollar index, a composite of six major currencies, has simply been on a tear since early spring. A twelve percent surge in the index plays an important role in lowering US import prices. American trading partners, however, must contend with higher costs for imports, especially for commodities such as food and energy which are dominated by US dollars.

Emerging markets have borrowed heavily in US dollars and, now, face higher debt service requirements. The surge in the US dollar index is forcing nations everywhere to raise domestic interest rates to stem an outflow of capital. Thus, the monetary authorities everywhere are jumping on this rate hike bandwagon. No longer content with policy rate increases of quarter or half point increases. These banks have raised rates as much as 100 bps, in the case of Canada; despite these moves, the Canadian dollar continues to weaken.

For the developed nations, the dollar surge is a matter of adjustment that can be readily absorbed without any significant impact on overall inflation. It is an entirely different case with emerging markets. The increase in financing US dollar debt is taking a heavy toll on the world’s poorest countries. These nations are turning to the IMF and the World Bank to renegotiate prior loans and or to seek additional emergency funding. China, for example, is providing emergency support worth tens of billions of dollars to the countries in its One Belt, One Road projects.

In a similar vein, the World Bank warns that central banks are playing with fire in the sense that rate hikes can be overdone, leading to a serious world slump and stresses on the financial. A similar argument is made by Obstfeld, formerly of the IMF, when he remarks that  “Just as central banks, especially those of the richer countries, misread the factors driving inflation when it was rising in 2021, they may also be underestimating the speed with which inflation could fall as their economies slow,” (Obstfeld). Meanwhile, the Fed continues to take a hard line on rates, leaving the developing nations little choice but to follow the leader...... but to what end?

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