Giant Step by the US in 28 Years... Concerns Over Repetition of 1994 'Bond Massacre'

'Tequila Crisis' and Other Emerging Market Domino Currency Crises
Long-Term Boom After Short-Term Turmoil Until the 2008 Financial Crisis
Greenspan, Leading the Fed at the Time, Served Four Terms... 18 Years of Long-Term Leadership

[Image source=EPA Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] As the U.S. Federal Reserve (Fed) raised its benchmark interest rate by 0.75 percentage points for the first time in 28 years, concerns are emerging that market turmoil similar to the so-called "bond bloodbath" caused by the giant step in 1994 could be repeated.

At that time, the giant step taken by Fed Chairman Alan Greenspan triggered a chain of currency crises in emerging economies such as Mexico, known as the "Tequila Crisis." Some analyses suggest it had a long-term impact leading up to the Asian financial crisis. On the other hand, it is also evaluated that the initial turmoil laid the foundation for a long-term boom in the U.S. economy.

According to the New York Times (NYT) on the 15th (local time), the Fed's so-called giant step of raising interest rates by more than 0.75 percentage points was the first since November 1994. As a strong measure against rapid inflation, the Fed raised interest rates seven times over about a year: once by 0.75 percentage points, three times by 0.5 percentage points, and three times by 0.25 percentage points. As a result, the U.S. benchmark interest rate rose from 3% to 6% over a little more than a year from February 1994 to March 1995.

The rapid rise in interest rates caused significant initial turmoil in the U.S. stock market. From February to April 1994, the S&P 500 index plunged more than 9% over about two months. At that time, investors criticized the Fed's rapid rate hikes, calling it a "bond bloodbath."

The impact of the U.S.'s high-intensity tightening policy caused massive capital outflows in emerging markets, which had a high proportion of foreign capital at the time, severely hitting their economies. Starting with Mexico's currency crisis in December 1994, known as the "Tequila Crisis," the crisis spread to Latin American countries such as Argentina, resulting in large-scale currency crises.

Subsequently, the currency crises in emerging markets spread to Asia, beginning with Thailand in 1997, followed by the Philippines, Malaysia, Indonesia, and South Korea, which faced a series of currency crises. Due to a flood of International Monetary Fund (IMF) bailout requests from emerging countries at the time, the crisis is also referred to as the IMF crisis in South Korea and many other emerging markets.

However, the aggressive rate hikes aimed at stabilizing inflation at that time are also credited with laying the foundation for a long-term boom in the U.S. economy from 1995 until the 2008 financial crisis. According to the Wall Street Journal (WSJ), the U.S. S&P 500 index recovered to pre-rate hike levels from March 1995 and began to rise sharply, increasing by more than 160% year-over-year by the end of that year.

Chairman Greenspan, who led the rate policy at the time, was recognized for his ability to manage inflation and the economy, serving four consecutive terms as chairman from 1987 to 2006, overseeing interest rate policy for 18 years.

This content was produced with the assistance of AI translation services.