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If the Fed Acts, How Do You React?

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If the Fed Acts, How Do You React?

The Liftoff Effect on Capital Flows

IMF,

5 min read
5 take-aways
Audio & text

What's inside?

What will happen to global capital flows as the Federal Reserve raises interest rates?

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Editorial Rating

8

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  • Innovative

Recommendation

Following the Federal Reserve’s December 2015 interest rate increase, market participants increasingly question what the rising rate environment will mean for global capital flows. Even when the Fed merely hinted in 2013 at the prospect of moving on interest rates, emerging market economies suffered an enormous capital exodus in the Taper Tantrum. This technical yet easily digestible analysis of rate hikes’ impacts from International Monetary Fund economist Swarnali Ahmed offers some clues as to whether history will repeat itself in 2016. getAbstract recommends this timely report to business and policy leaders.

Summary

From 1982 to 2006, the Federal Reserve conducted five “liftoff” events – characterized by the first interest rate hike after a period of stable or declining rates and marking the beginnings of extended phases of rate increases. In those times, emerging market (EM) economies experienced far greater turbulence and destabilizing effects on their capital flows then advanced market (AM) economies did. History may provide some perspective on how investments will migrate internationally in a rising interest rate environment.

Investors place capital globally based on their assessment of...

About the Author

Swarnali Ahmed is an economist at the International Monetary Fund.


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