World Bank Warns of Financial Turbulence if US Fed Raises Rates

By Eric Blair

The World Bank published a report today warning of possible financial turbulence in developing countries if the Federal Reserve raises interest rates this Thursday.

The BBC summarizes:

The World Bank has warned developing countries to brace themselves for possible financial turbulence when the US Federal Reserve starts to raise interest rates.

It could come as early as Thursday when the Fed concludes a policy meeting.

A new report from the World Bank says there will probably be a modest impact on developing countries.

But it also warns there is some risk that it could be worse.

The Bank says it is possible that there would be sufficient disruption to capital flows into developing countries to harm economic growth and financial stability.

‘Perfect storm’

US interest rates have been practically zero for more than six years and as the economy continues to recover, the Fed is sure to raise interest rates at some stage. The prospect has been a major concern for financial markets all year.

Developing countries are bound to be affected when it happens and the first step might be imminent.

The report concludes that the developing world should be “hoping for the best but preparing for the worst.” The hope is based on an expected ‘slow’ increase in interest rates and the ‘strength’ of the US economy (as indicated by rising rates).

At this time, the US economy doesn’t appear strong enough to warrant a rate hike after the Fed’s policy meeting. Yet it seems inevitable that they will try to raise rates at some point even if only to test the outcome.

The good news is that people in these nations and around the world will likely have a little more time to prepare for the disruption that the World Bank expects.

Eric Blair writes for ActivistPost.com