World Economy

If the Fed hikes, who in the world will follow?

If the Federal Reserve hikes interest rates in December, as is now expected, only a handful of central banks around the world are expected to join it anytime soon.

Economists forecast that monetary authorities in Mexico, Saudi Arabia, Hong Kong and Peru are among the likeliest candidates to join the Fed in hiking rates. Earlier this month, South Africa hiked a quarter-point as its currency depreciated against the dollar. Like South Africa, the other central banks likely to move would do so to protect their currencies and stem potential capital flight and inflation on imported goods, which rises when currencies depreciate.

The Federal Reserve building in Washington, D.C.
Kevin Lamarque | Reuters

But a wholesale global tightening does not appear to be in the cards. The European Central Bank is seen loosening policy next week, potentially increasing bond purchases, and Japan, suffering two consecutive quarterly declines in growth, will likely stand pat on its 0.1 percent policy rate.

The biggest question is the Bank of England, which not too long ago was seen moving in sympathy with the Fed. But Carl Weinberg of High Frequency Economics says that's not in the cards right now. "The whole argument of the U.K. moving along with the U.S. is moot right now,'' he said, because of easing wage pressure and growth concerns. An influx of immigrants, said Weinberg, has lessened wage increases. The earliest Weinberg sees a BOE rate hike is April.

Stanley Fischer, vice chairman of the U.S. Federal Reserve.
Fed Vice Chair Fischer signals rate hike
New York Federal Reserve President William Dudley
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With the U.S. hiking and other major central banks staying put, economists see a case for the dollar to continue to strengthen. "A stronger dollar is my No. 1 call and concern," Weinberg said.

JP Morgan Chief Economist Bruce Kasman echoed that worry, saying the US's lone action "increases downside tail risk" for the US economy. Translation: he doesn't see the negative outcome as very likely, but he's more worried with the Fed acting alone. Kasman is as concerned with the Fed waiting too long. He sees global inflation indicators turning up in 2016 when the sharp drop in oil prices from earlier this year starts to drop out of the comparisons.

Janet Yellen
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The main question is how prepared emerging market central banks are for a Fed rate hike and how much the Fed actually ends up hiking beyond the first quarter-point rise. Top Fed officials have insisted that rate hikes will be gradual and shallow. Fed Vice Chair Stanley Fischer recently said that emerging market central bankers have been telling the Fed to "just do it," which suggested to him that they were prepared for a rate hike. He has said previously that those countries that have not dealt with their budget deficits and have large external debts, that is, in foreign currencies, could be among those hardest hit by a Fed rate hike.

This won't be the first time the Fed has acted before other major central banks. It cut rates in January 2001, five months before the newly born European Central Bank. The Fed hiked in June 2004 (the last time the Fed raised rates), 18 months before the ECB would move. And it cut again in September 2007, 11 months before the ECB, which actually flirted with raising rates once during the period.

The history shows that the big global central banks often are not synchronized but they do appear to move in the same general direction over the medium term when a Fed rate hike eventually leads to the Europeans' and the Brits' following suit. Japan, which has its own, unique problems with deflation, is less predictable, but it did join the Fed and the ECB in hiking in 2005 and in increasing bond purchases in the wake of the financial crisis.