Interview: U.S. interest rates hikes have negative effects on global economy, says scholar

LONDON, July 28 (Xinhua) -- Rises in U.S. interest rates will negatively affect the global economy, and this is one of the difficult circumstances where the centrality of the U.S. dollar imposes many hard choices upon other economies and policy makers, a British scholar has said.

"We're moving from a situation of quantitative easing and fiscal stimulus ... to a situation where hard choices are going to be imposed on various market actors," said James Morrison, an associate professor in the Department of International Relations at the London School of Economics and Political Science, during a recent interview with Xinhua.

The U.S. Federal Reserve is on an aggressive rate hike cycle. On Wednesday, it raised its benchmark interest rate by 75 basis points, bringing the total interest rates hikes since March to 225 basis points.

"The question is whether there could be a global recession triggered by the U.S. approach to inflation. And the answer to that is absolutely there could be, and it is quite conceivable, more than just could," Morrison told Xinhua, noting that depending on the Fed's approach, it "might even be likely."

"It all depends on just how aggressively the Fed raises interest rates," said the scholar specializing in international political economy. "By slowing the U.S. economy, a massive consumer, this will slow U.S. consumption of goods and services around the world."

Meanwhile, by raising interest rates, he added, "it's going to make it harder for governments and other economies to borrow on the open market to finance budget deficits. It's going to raise their borrowing costs and it's going to suck money out of the economy in the long run."

Morrison said the trouble is the United States has pumped a huge amount of money into the economy over the last decade and a half, and that the Fed is now trying to control this inflation "vigorously."

"It's all the delicate balance," he said, noting that if they move too quickly, "we could move into recession" and if they move too slowly, then there is the problem of inflation.

On the impact of the U.S. rate hikes on emerging markets, the scholar said developing countries are at the mercy of the U.S. dollar.

Strengthening the U.S. dollar makes it very difficult, perhaps impossible, for developing economies to service their dollar denominated debts, Morrison said.

In other cases, countries used to relying on cheap imports might face difficulty as the dollar strengthens and the patterns of the global trade shift accordingly, he added.

It also has consequences for Europe. The euro recently plunged to parity with the U.S. dollar for some time before it rebounded a little, reaching the lowest level in nearly 20 years.

Morrison said the parity came as "a little bit of a symbolic thing that embarrasses the European Central Bank and the architects of the European Monetary Union."

However, he added, "more substantively, more deeply, the real implication is that it's going to affect the patterns of trade between the U.S. and the EU and also the patterns of investment, not just between these two massive economies, but between those two economies and all the rest of the world."

As the U.S. dollar gets stronger, it could help the Europeans export more, Morrison said, "but it will also perhaps trigger more investment into the U.S. from the rest of the world, and indeed from Europe."