World Bank warns ‘prepare for the worst’ on United States rate rise

The dollar shrugged off a pair of widely watched economic indicators Tuesday and continued to trade within a tight range against its main rivals as investors waited to see if Federal Reserve policy makers would raise interest rates at their meeting later this week.

An uncommon debate has raged over whether the U.S. central bank should go ahead with a quarter-point increase to the federal funds rate that would nevertheless mark a crucial break with the Fed’s crisis stance since 2008.

Investors expect the BOJ to expand its stimulus program in October, said Kit Juckes, a currency strategist at Société Générale. but despite this, the dollar gave up all of its overnight gains against the yen. The Dollar Index had witnessed volatile movements after China’s yuan action and had also weakened a bit as hopes of Fed rate hike recede.

It acknowledges any increase to U.S. rates has been expected for a long time and rate rises are set to be gradual.

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

“Emerging and frontier market economies may hope for the best during the upcoming tightening cycle, but given the substantial risks involved, they would do well to buckle their seatbelts in case the ride gets bumpy”, Carlos Arteta, lead economist in the Bank’s Development Prospects Group.

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

Last week Andrew Levin, a Dartmouth economics professor who worked at the Fed for 20 years, argued that the USA economy still harbors weaknesses that undermine the argument to increase interest rates.

“The change in the circumstances which began with the Chinese devaluation is relatively new and we are still watching how it unfolds”, Fed Deputy Chair Stanley Fischer said at the end of August.

“So it’s a hard situation in a world where we do not have a synchronized global recovery, where arguably the world’s most important liquidity provider is tightening policy, and that will continue to hit commodity prices“.

Many have trade and budget shortfalls, and their governments and companies have high levels of USA dollar debt, that make them particularly vulnerable to tighter conditions in global markets and a stronger dollar.

“If the Fed does decide to hike this week, the cost of buying United States dollars could spike very sharply”. He stressed that monetary policymakers needed to keep a more worldwide perspective.