Should the Caribbean brace for a Federal Reserve rate hike? #Caribbean #trade

The Federal Reserve is expected to raise rates on its federal funds rate, the rate at which its member banks lend each other money overnight, at least three times during 2018. I see this move as having a potential negative impact on Caribbean immigrants here in the U.S. given their lower incomes relative to other immigrants and the U.S. overall, and the level of poverty among Caribbean immigrants. I see the Federal Reserve’s expected rate hikes having an impact on remittances as well because rate hikes, designed to control inflation could very well discourage employing Caribbean born labor.

The Federal Reserve has an overall positive outlook on the American economy. While growth is expected to continue, the central bank views the growth as fragile.

The Trump tax cuts are expected to provide the economy with an additional boost. The pay increases Americans are receiving as a result of the temporary cuts are expected to re-enter the economy in some form. Unemployment is at 4.1%, the textbook case for full employment, a point at which additional hiring and the resulting spending may create increases in prices for goods and services.

There is a 78% chance the central bank will raise intra-bank lending rates and in theory when this happens, the rates you pay for revolving loans and mortgages are expected to follow suit. On the other hand, the even with low unemployment, wage increases are expected to be sluggish.

Caribbean immigrants may bear a higher burden stemming from price increases versus other immigrants and the overall U.S. population. According to data from the Migration Policy Institute, twenty percent of Caribbean immigrants live in poverty compared to 19% of overall foreign born U.S. residents and 15% of the overall U.S. economy. Caribbean immigrant median income ($41,000) falls well below the overall U.S. median income ($55,000) as well as the median income of all immigrants ($49,000). Assuming Caribbean immigrants, like the overall U.S. population, has the bulk of its wealth in a house, poorer Caribbean immigrants will have less of a buffer protecting them from a credit-shortage induced recession.

As prices increase and access to credit is reduced due to rate increases, there may be a negative impact on the ability of Caribbean immigrants to send money back home as household budgets are reduced. Take for example remittances sent to St.Kitts-Nevis. According to data from The World Bank, remittances increased to $36 million in 2007 from $29 million in 2002.  Remittances climbed to $51 million in 2012, but have remained flat into 2017 where the amount of remittances was $53 million. All things being equal, interest rate increases could start sending these numbers in the opposite direction.

Rate increases could make importing products such as food and machinery more expensive for residents of St Kitts-Nevis or other Eastern Caribbean islands. In theory, a rate increase should depreciate the value of the U.S. dollar, making American imports cheaper. Some analysts would argue, however, that higher interest rates would make the American currency more valuable as foreign nationals seek higher yields on their capital and drive up demand for American currency. If the dollar becomes more expensive, the cost of purchasing could go up as well.

According to the U.S. Central Intelligence Agency’s World Factbook, 56.8% of St Kitts-Nevis’ imports come from the United States. As American goods become more expensive, St Kitts and other Caribbean countries that are heavily tourist dependent, may have to look for alternative and less expensive sources of food, a search that involves increased transactions costs or bite the bullet of increasing costs of American goods.

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