Newspaper article International New York Times

Aftershocks of Rate Rise Could Ripple Worldwide ; Policy Makers Look Back 20 Years to Volatility That Led to Bailout for Mexico

Newspaper article International New York Times

Aftershocks of Rate Rise Could Ripple Worldwide ; Policy Makers Look Back 20 Years to Volatility That Led to Bailout for Mexico

Article excerpt

Policy makers are reminded of the so-called "Tequila Crisis" of 20 years ago, when Mexico had to be bailed out by the United States and the I.M.F.

Lots of buzz about the impact of higher interest rates in the United States. A major trading partner creating shockwaves in the global economy. Stock market volatility around the world.

Sound familiar? It certainly does to Federal Reserve policy makers, who hesitated this past week about lifting their key interest rate lever from close to zero because of concerns about the ripple effects of a shaky Chinese economy and uneasy global financial markets. What they remember is a situation that played out more than 20 years ago, in 1994 and early 1995.

Back then, the country in question was Mexico, as rising rates in the United States put pressure on an emerging market economy already suffering from a weakening currency and too much debt.

Ultimately, Mexico had to be bailed out by the United States and the International Monetary Fund. And something like the so-called Tequila Crisis and other episodes of global economic turmoil in the 1990s are exactly what officials hope to avoid -- or at least lessen -- as they prepare for when the Fed finally raises rates.

"There is no doubt that policy makers in emerging markets have been trembling in their boots at the prospect of a Fed rate hike," said Kenneth S. Rogoff, a professor at Harvard and former chief economist of the International Monetary Fund.

In fact, Fed policy makers mainly cited global economic conditions -- not domestic ones -- when they decided not to raise rates at their meeting on Thursday.

That was the right call, said Lawrence Summers, who served as Treasury secretary during the Clinton administration and more recently was director of the National Economic Council in President Obama's first term.

"People often underestimate the risks, especially when you have a lot of volatility and things can go wrong that you can't foresee," he said. "Given what's happening in China, Brazil and other emerging markets, there's still reason for being cautious if there are no signs of substantial inflationary pressures anywhere."

Much of Wall Street is now looking for the Fed to finally tighten monetary policy at its last meeting of the year, in December. …

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