Risks and Response Strategies for Emerging Market Capital Flows During the Fed's Rate Hike Cycle

Abstract

The Fed's rate hike cycle profoundly impacts the capital flow pattern of emerging market economies through multiple channels. This article systematically analyzes its transmission mechanisms and historical experience, revealing the severe challenges currently facing emerging markets: a sharp slowdown or even reversal of cross-border capital inflows, exacerbating financial market volatility and currency depreciation pressures; a significant increase in external debt burdens, putting pressure on the debt repayment sustainability of some highly indebted economies; and suppressed internal growth momentum, severely squeezing macroeconomic policy space. Historical lessons show that economies with insufficient foreign exchange reserves, fragile external debt structures, and imperfect policy frameworks are particularly vulnerable. To effectively respond, emerging markets need to develop a comprehensive strategic framework: strengthen macroprudential supervision and targeted management of external debt risks; implement a flexible exchange rate regime supplemented by necessary foreign exchange intervention; optimize fiscal revenue and expenditure structures to ensure debt sustainability; promote economic diversification to reduce external vulnerabilities; and actively participate in the development of the global financial safety net and international policy coordination. This article emphasizes that forward-looking policy reserves and resolute structural reforms are key to strengthening emerging markets' resilience and maintaining financial stability.