US rate hike risks

This year's Jackson Hole Economic Symposium, the biggest annual jamboree in the world of central banking, starts Thursday. Jackson Hole is a beautiful mountain town in Wyoming, famous for golf and horseback riding in summertime, and skiing in wintertime. It's a nice place to relax.

But there's tension in the air, because enormous amounts of money around the world are poised to move the instant as the Fed raises interest rates. The question is: When will that instant come?

For months, foreign exchange traders and other financial speculators have been obsessively asking whether Fed chair Janet Yellen will raise rates in September or wait until the end of the year. And Ms. Yellen has decided not to attend the Jackson Hole meeting this year. Maybe she's tired of endlessly being asked the same question: When's the rate rise coming, Janet?

She's partly to blame for that. For months, Ms. Yellen went back and forth on the rate-hike question. Sometimes she said the time was nearly ripe; other times, that the economic recovery wasn't robust enough yet, a hike would have to wait.

US business cycle is ramping toward peak

But now, the US business cycle is moving into high gear, and the unemployment rate in the world's biggest economy is moving toward the low levels at which workers' bargaining position could get strong enough to induce economy-wide wage increases - which are usually a key factor in driving inflation.

That's why Martin Hüfner, chief economist of Assenagon Group, expects the US central bank to begin raising the bank rate in September: "Firstly, they've prepared financial markets for that, and secondly, it's necessary to return to more normal conditions in the capital markets," Hüfner said.

Since the global financial crisis broke out in autumn 2008, the rate at which the Fed lends money to banks, called the "federal funds rate," has been at its lowest levels in history - between 0.0 and 0.25 percent. With interest rates offered to savers by commercial banks set lower than the inflation rate, prosperous folks with money put aside have complained about having their savings devalued, or even "expropriated," as a side effect.

Players in financial markets with the ability to borrow on margin, on the other hand, have become addicted to cheap money. Moreover, the Fed's policy of large-scale bond-buying between 2009 and October 2014, under previous Fed Chairman Ben Bernanke - a policy often called "quantitative easing" or QE - flooded $3.5 trillion (3.1 trillion euros) into the accounts of institutional investors. The wall of money had to be invested somewhere, and so QE's net result was a sustained equities boom.

Emerging market business cycles are ramping down

With QE over and interest rates set to rise in the near future, there's angst in the markets about what might happen next. Two years ago, hints from Bernanke that QE was nearing an end were enough to put emerging-economy currencies and financial markets under massive downward pressure. Among the hardest-hit countries: Brazil, South Africa, Turkey, Indonesia and India, which since have been dubbed the "fragile five."

"What made them especially vulnerable was their high trade deficits, which became more expensive to finance in 2013 because of slightly higher US interest rates and a stronger US dollar," wrote Commerzbank analyst Lutz Karpowitz in a report. Since then, India's trade deficit has grown substantially smaller. Indonesia's has shrunk somewhat too. But the other three countries' finances remain fragile.

"Brazil worries me most," Martin Hüfner told DW. Production and consumption are both in decline, and inflation is hitting double-digit levels. Russia, too, is in dodgy condition. The ruble is continuing to lose value as the price of crude oil sinks. As for Turkey, political uncertainty is putting the Turkish lira under downward pressure. In Mexico, a political and economic crisis is brewing for other reasons. The circle of unstable emerging economies is growing.

China: The elephant in the room

As if all that weren't enough, now the economic uncertainty connected to China's internal debt crisis is threatening to infect its trading partners. The global economy is growing more slowly than expected, Chinese exports are declining, Shanghai share prices are plunging.

The Chinese government has tried to intervene, but with little success. In early August the Chinese central bank reduced the yuan's exchange rate by 4 percent - not once, but twice in rapid succession. That caused shock waves on global financial markets.

The China virus has already infected all the other emerging economies: According to the Dutch wealth management company NN Investment, nearly a trillion dollars has been pulled out of emerging markets over the past 15 months.

The problems in China and Brazil have little or nothing to do with American interest rates, but a rate hike would nevertheless intensify negative trends in emerging markets - because it would probably cause a great deal more money to be pulled out. That could happen very quickly, and the result "could be something like the Asian crisis at the end of the 1990s, when countries would have to impose capital controls and protectionist measures" to prevent the collapse of their economies, Assenagon chief economist Martin Hüfner told DW.

The risks for Europe

Europe isn't at the center of this particular economic storm. On the contrary: the stronger dollar has been helpful to the eurozone, by making euro-denominated exports more competitive on global markets. But if emerging-market turbulence gets too severe, Europe will feel the effects.

A global economic crisis is about the last thing the world needs at the moment. The world today has barely any tools left in hand with which to combat a crisis. "Unlike in 2008, we don't have any monetary policy leeway to counter a recessionary trend," according to Hüfner. Interest rates are already at near-zero levels. Big stimulus packages like the ones introduced in 2008 aren't likely either, since many national governments are already groaning under high debt loads.

In view of terrifying scenarios of possible emerging-economy crises and collapse resulting as the unintended side effect of an interest rate turnaround, the Fed is considering delaying the modest rate hike planned for September after all - the first it would have made since 2006.

In Jackson Hole this week, amid the pleasures of a summer mountain landscape, the world's central bankers will have an opportunity to discuss how to deal with the consequences of years of ultra-easy monetary policy - and how, or even whether, it might be possible to achieve an interest rate turnaround without causing a global economic catastrophe.