THE HINDU Editorial Vocabulary - March 24, 2018 - Topic 2

Rising risks — on Fed rate hike

The U.S. Federal Reserve continues to slowly pull away the punch bowl as the party gets going. This week the Fed raised its benchmark short-term interest rate by 25 basis points to 1.50-1.75%, the highest in a decade. While this is only the sixth rate increase since the financial crisis of 2008 — which pushed central banks to cut interest rates to historic lows — it portends further increases in global interest rates. 

Higher borrowing costs could squeeze both markets and the wider economy. If its dot-plot projections are considered, the Fed under its new Chairman Jerome Powell — who chaired the Federal Open Market Committee meeting for the first time on Wednesday — is expected to raise rates two more times in 2018. And with the American economy projected to grow at a fairly healthy clip amid quickening inflation, the increases in the Fed’s discount rate are expected to gather pace over the next two years. Now, as the Fed and other global central banks move towards normalising monetary policy, the impact on the wider credit markets is slowly beginning to show. This is particularly so in the case of the interbank lending market, which is directly influenced by central banks to affect interest rates across the board. The London Interbank Offered Rate, which is the rate at which international banks lend to each other and serves as a benchmark for lending rates, has risen for more than 30 consecutive sessions and is at its highest since the financial crisis. Its effect has spilled over into other markets, including the corporate debt market.

Rising rates amid improving global economic growth could adversely affect the capacity of private firms to service their debt. This risk of default by private borrowers has been flagged by various organisations, including the International Monetary Fund last month. It is, after all, no secret that private corporations attracted by ultra-low interest rates had heavily loaded up on debt over the last decade. Some companies borrowed heavily from across the borders, thus making them prone to exchange rate risks as well. Any widespread default on debt today would be reminiscent of the 2004-2006 period when the Fed’s raising of rates to tackle inflation led to a mass default on U.S. mortgage debt. Global markets on Friday witnessed a steep sell-off that was immediately linked to President Donald Trump’s recent decision to impose new tariffs on China. Trade wars clearly have a negative impact on global growth and corporate earnings. But the wider sell-off, under way since February, can also be linked to rising interest rates which adversely affect asset prices. India, which could be hit by fund outflows as overseas investors look homeward to benefit from the rising rates, would do well to take precautionary steps.

Vocabulary

Bowl: a stadium for sporting or musical events.

Example: The Hollywood Bowl

Synonyms: stadium, arena, amphitheater, colosseum

Crisis: a time of intense difficulty, trouble, or danger.

Example: The current economic crisis

Synonyms: emergency, disaster, catastrophe, calamity, predicament, plight

Squeeze: an act of pressing something with one's fingers.

Example: A gentle squeeze of the trigger

Synonyms: press, pinch, nip, grasp, grip, clutch, hug, clasp, compression

Projected: estimate or forecast something on the basis of present trends.

Example: Spending was projected at $72 million

Synonyms: forecast, predict, expect, estimate, calculate, reckon

Amid: surrounded by; in the middle of.

Example: Our dream home, set amid magnificent rolling countryside

Synonyms: in the middle of, surrounded by, among, amongst, amidst

Impact: the action of one object coming forcibly into contact with another.

Example: There was the sound of a third impact

Synonyms: collision, crash, smash, bump, bang, knock

Influence: the capacity to have an effect on the character

Example: The influence of television violence

Synonyms: effect, impact, control, sway, hold, power, authority

Consecutive: following continuously.

Example: Five consecutive months of serious decline

Synonyms: successive, succeeding, following, in succession, running, in a row

Adverse: preventing success or development; harmful; unfavorable.

Taxes are having an adverse effect on production

Synonyms: unfavorable, disadvantageous, inauspicious, unpropitious

Reminiscent: tending to remind one of something.

Example: The sights were reminiscent of my childhood

Mortgage: convey a property to a creditor as security on a loan.

Example: The estate was mortgaged up to the hilt

Precautionary: carried out as a precaution.

Example: She was taken to the hospital as a precautionary measure

Synonyms: preventative, preventive, safety