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Even one small interest rate increase by the Fed could have a sweeping impact on U.S. and world economies, Komal Sri-Kumar told CNBC on Monday.
“I think they are going to hike” on March 15, Sri-Kumar said on “Squawk Box,” echoing a theory shared by many analysts. “But that is going to prompt capital outflows from the euro zone, especially with the political risk. It is going to increase the capital outflow from China, and the U.S. economy will feel the impact.”
These moves would strengthen the dollar against other currencies, putting downward pressure on the euro, said Sri-Kumar, president of Sri-Kumar Global Strategies.He acknowledged that some of that pressure “is probably good for the European economy from a trade perspective” because European exports would become cheaper to foreign partners.
“The problem is in terms of capital outflows,” he said, cautioning that divestment in Europe could raise risk in overseas markets. “These economies, despite some positive numbers, … they are not in strong enough shape to take an increase in interest rates on the part of the United States.”
“We have had too long a period of excessive liquidity,” he said. “The markets have been distorted. The bond yields are very, very low, much lower than they would have been in the absence of quantitative easing and zero interest rate policy.”
As a result, small changes in the U.S. economy reverberate worldwide, Sri-Kumar said, adding that had the Fed started hiking rates as the country emerged from the 2008 financial crisis, the United States may have been better off.
Full article: The world economy can’t handle even one US rate hike, strategist Sri-Kumar says (CNBC)