Every interest rate hike and cut by the United States has a profound impact on the global economy. From 2022 to this year, the U.S. has not hesitated to raise interest rates globally multiple times for its own economic interests.

Each interest rate hike by the Federal Reserve can "ignite" the global financial markets, which has left many people puzzled. Why does each interest rate hike by the U.S. have such a significant impact on global financial markets? When might there be a possibility of interest rate cuts?

Motives for the Federal Reserve's Interest Rate Hikes

Since 1983, the Federal Reserve has experienced seven rounds of interest rate hikes, each based on domestic and international economic conditions. From March 2022 to the present, the Federal Reserve has continuously raised interest rates to 5.25%-5.5%.

The reason why the Federal Reserve has been continuously raising interest rates in recent years is to reduce inflation. In the field of economics, the best way to combat inflation is through interest rate hikes. The cause of inflation is often an excess supply of money. When people have more money, they tend to consume more, and when demand outstrips supply, it leads to an increase in the prices of goods.

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For example, the recent global bestseller of the video game "Black Myth: Wukong" has led to a shortage of PS5 consoles, causing their prices to rise. In such a situation where demand exceeds supply, the price of PS5 consoles will increase, and the increase is a manifestation of inflation.

Now, with the continuous rise in the prices of global raw materials, goods will experience a phenomenon where it is easy to raise prices but difficult to lower them. When all items in our daily lives see price increases, it means that all commodities around us are experiencing inflation.

A country's finances can be likened to a balloon, with the air inside representing inflation. When inflation reaches a certain level, it can burst the entire balloon, and at that time, the country's financial system will face a significant challenge.

The large-scale interest rate hikes by the U.S. this time are also in response to the increasingly severe inflation phenomenon in the country. From the COVID-19 pandemic that began in 2020 to the Russia-Ukraine war in 2022, the U.S. stock market has experienced several circuit breakers, and interest rate hikes have seemingly become the only lifeline.Starting from March 2022, the United States has embarked on a cycle of interest rate hikes, with the number of increases now reaching 11 times. This frenzied approach is bound to impact the global economy.

On August 19th, Federal Reserve officials released a statement suggesting that "it is time to consider adjusting the current interest rate range of 5.25% to 5.5%," marking a high not seen in 17 years. The continuous interest rate hikes by the Federal Reserve are driven by deeper considerations. As the primary global reserve and settlement currency, the US dollar has a significant impact on the world economy.

Each interest rate hike by the United States influences the flow of global capital, thereby further solidifying the dominant position of the US dollar. However, large-scale, sustained interest rate hikes can also be detrimental to the economy, as people tend to save rather than spend, leading to economic issues.

In addition to interest rate hikes, the United States faces another critical issue—national debt.

The United States is "addicted to borrowing."

In recent years, the scale of US national debt has been increasing at an accelerating pace. It took only eight months to climb from $31 trillion to $32 trillion, which was nine years earlier than predicted before the pandemic. Even more surprising is that the increase from $32 trillion to $33 trillion took just three months.

In the long term, economic decline has been a significant cause of chronic fiscal imbalances. Since 1985, the United States has transitioned from a net creditor nation to a debtor nation, with national debt continually rising. The growth rate has been increasing in recent years. In 2017, then-President Trump signed the Tax Cuts and Jobs Act, attempting to fund tax cuts through large-scale borrowing.

Such consequences lead to a persistent rise in US debt issues, with the debt scale growing exponentially, similar to a "snowball effect." While large-scale borrowing has temporarily protected the US economy, these debts will eventually need to be repaid. From September 2017 to January 2022, the scale of US debt has been expanding, with a particularly rapid growth trend in recent years. As of August this year, US national debt has surpassed $35 trillion for the first time.

According to the Congressional Budget Office's forecast, by 2024, the US national debt will reach a staggering $50 trillion, with debt exceeding 122% of the Gross Domestic Product (GDP). Even the richest man in the United States, Elon Musk, has posted on social media: "At the current pace of government spending, the United States is on a fast track to bankruptcy. Government overspending is the cause of inflation."According to some mainstream media in the United States, the rapid growth of U.S. debt is attributed to an aging population, rising healthcare costs, and insufficient tax revenue. Although the pandemic has had an impact on the U.S. economy, the country had already begun issuing a large volume of government bonds before the pandemic.

The increase in U.S. national debt is related to the Federal Reserve's interest rate hikes. Since the Federal Reserve began raising interest rates in March 2023, and with the last increase of 25 basis points in July of the previous year, the federal government has pushed the target range for the benchmark interest rate to between 5.25% and 5.5%.

The high interest rates have a clear suppressive effect on the U.S. economy and have led to a rapid increase in the interest cost of U.S. debt. The U.S. interest rate hikes have made the dollar more valuable, and U.S. debt is also affected by these hikes, attracting more investors to purchase.

Following the Federal Reserve's interest rate hikes, the interest rates on short-term U.S. Treasury bonds have also risen at a similar pace. The interest rate on three-month short-term Treasury bonds increased from 0.15% at the beginning of 2022 to 5.24% in April of this year. The increase in short-term Treasury bond interest rates means that the U.S. has to repay over $2 billion in expenses daily. In the future, the U.S. will spend more on interest payments than on defense expenditures.

Many U.S. politicians choose to ignore the debt issue, as they do not consider it the most pressing topic. Although the debt issue has caused concerns among various parties, it is unlikely that the two major parties in the U.S. will introduce policies to cut spending and control debt in the upcoming presidential election.

Currently, U.S. politicians and Federal Reserve officials are grappling with the domestic issue of interest rate hikes and debt, feeling "overwhelmed." They must understand how to weigh the pros and cons while also avoiding an economic recession. It seems like an unsolvable mathematical problem, where getting one number wrong could lead to a complete loss.

Impact of Interest Rate Hikes

Americans enjoy consuming and have a deep dependence on credit cards. Since the outbreak of the pandemic in 2020, the U.S. has provided residents with substantial cash subsidies to stimulate the economy, which has also maintained a high level of consumption. Long-term consumption habits have led to a culture of spending in the U.S.

Fiscal expansion during the pandemic and loose monetary policies have continuously stimulated the U.S. economy and rapidly increased inflation. Long-term inflation has brought a heavy debt burden to the public. Currently, U.S. price levels are at a high stage, with energy and rent prices continuously rising, increasing the cost of living for American families.

The Federal Reserve's interest rate hikes have also led to increased interest rates on U.S. credit cards, adding to the difficulty of repayment. This has resulted in many Americans carrying credit card debt. Some U.S. residents are unable to repay their consumer loans on time and have to use new debt to offset old debt, attempting to extend their repayment dates. However, the continuous interest rate hikes by the Federal Reserve have led to a continuous rise in the debt levels of the American public.In the second quarter of 2024, the total household debt in the United States soared to a staggering $17.80 trillion, marking an increase of $109 billion from the first quarter of the same year. This unprecedented debt level includes a credit card debt of $1.14 trillion.

Young Americans, particularly in their twenties and thirties, are notably fond of defaulting on credit card payments, which is not a positive sign for the nation's economy. Individuals in this age group often struggle with debt repayment due to their typically lower incomes and limited savings, leaving many unable to settle their credit card balances.

Interest rate hikes can also lead to an increase in bankruptcies. Many small startups, when faced with rising loan interest rates, find themselves incapable of repayment, ultimately leading to bankruptcy. These interest rate increases not only stimulate borrowing costs but also contribute to higher housing prices, thereby increasing the repayment pressure on renters and those purchasing homes through installments.

The United States' interest rate hikes can also impact the economies of other countries, including Japan. The Japanese economy is highly dependent on the US dollar, and since World War II, Japan has essentially been under the control of the United States, acting as a "junior partner."

For instance, the real estate bubble of the past led to the harvesting of countless Japanese assets, and the Japanese yen was also invisibly harvested by the US dollar. Interest rate hikes have both advantages and disadvantages. The initial reason for the US to raise interest rates was to combat inflation. As inflation subsides and the job market slows, it has also accelerated the Federal Reserve's determination to shift its policy on interest rate hikes.

It is conceivable that the Federal Reserve will soon lower interest rates. Since the second half of 2023, the continuous rise in the US stock market has essentially overspent a significant portion of the subsequent interest rate cuts. Once the interest rate cut is implemented, some funds may take profits and exit. The impact of the US dollar on the global economy can be seen from this interest rate hike process.

In recent years, as the global trend of "de-dollarization" has been gaining momentum, an increasing number of countries and regions are seeking to break free from their dependence on the US dollar. The emergence of new national currency systems, along with the rapid development of digital currencies, is signaling that the foundation of the US dollar's hegemony is being shaken.

The United States' practice of exploiting its financial hegemony to harvest wealth from around the world is actually overdrawing the credit of the US dollar. Each time the US does this, the credit of the US dollar is diminished. The current global trend of de-dollarization is a significant manifestation of the world's loss of trust in the US dollar.

For a long time, the US dollar has been the most important reserve and pricing currency globally. However, in the face of financial crises and geopolitical events, over-reliance on the US dollar will inevitably lead to the United States' rampant wealth harvesting and risk shifting. The tragic experiences of Japan and South Korea in the past two years are the best proof of this.