Alas! After months of waiting and a volatile year in the global markets, the Federal Reserve announced Wednesday that it will be increasing rates from close to zero to between 0.25% and 0.5%. This is the first interest rate rise in almost a decade, and the effects of the increase will spark volatility in domestic markets as well as international markets. The rate hike is meant to signal economic strength in the United States by showing that the economy is strong enough to handle larger borrowing costs. Janet Yellen, the Federal Reserve chair, explained that further rate hikes will be “gradual” in an effort not to slow economic recovery.
Who is feeling the early effects of the rate hike? Corporations in emerging markets that have engaged in U.S. dollar denominated debt are going to have trouble paying off their debt as their currencies lose value. Many of these firms flocked to U.S. debt as it was cheap and easy to access, and now are dealing with the effects of debt that is tougher to repay. Following one of the most active years of mergers and acquisitions, companies remain more levered than ever. These highly debt driven acquisitions become more risky as rates rise, and it will be felt all over the world as international corporations engaged in the U.S. take out debt to finance the M&A activity.
The global economy will now be in focus for both corporations and investors as debt financing becomes more expensive in the U.S. A stronger dollar is scary for a lot of central banks as they seek to avoid deflation and difficult debt repayments. With the rate hike, China’s currency coming off a large decline, and Europe currently undergoing monetary easing, investors are cautious moving into 2016. How do you see the global economy reacting in 2016?