Here's How The Fed's Decisions Will Affect Central Bankers Around The World

Since the financial crisis, most central banks around the world have loosened their monetary policies in an effort to kick-start struggling economies. However, as economic conditions began to improve, central bankers were faced with the question of when and how to raise interest rates without damaging the blossoming recovery.

So far, banks that have raised rates have failed and ended up lowering rates again to keep their economies from crumbling. However, the U.S. Federal Reserve is hoping to set a precedent for other banks around the world by raising rates slowly and keeping them that way.

This month, the bank elected not to make a move on interest rates, but most expect to see a rate hike before the end of the year. The Fed's decision making has been a market mover in the US as investors batten down the hatches for further volatility in share markets. However, the Fed's interest rate decisions are likely to have further reaching implications and could help influence the actions of central banks around the world.

Europe

On Thursday, the Fed announced that U.S. interest rates would remain near zero despite speculation that the bank would make a move in September. The decision drove the dollar lower and gave the euro a boost, something the European Central Bank may find troublesome.

Related Link: 3 Very Different Reactions To The FOMC Rate Decision

While the US moves to tighten, the ECB has been accommodating with its monetary policies in order to stimulate the eurozone economy. However, with the euro gaining strength, the bank may find it necessary to dole out more stimulus in order to keep the region's economy afloat.

Slow And Steady

Once the Fed does decide to raise interest rates, it's possible that other central banks may follow suit. However, the Fed is likely to play guinea pig for others like the Bank of England, which foresee a rate increase in the future but worry about how it will impact the economy. The Fed claims its approach to rate hikes will be slow and steady so as to avoid panic, but some say that the volatility that comes alongside a rate increase will be impossible to avoid.

Strength May Not Be Enough

For other central banks like the Reserve Bank of India, the Fed's delay in raising rates is an important lesson -- that growth which relies heavily on central bank stimulus is little more than an illusion. The global turbulence seen in markets today is one reason the Fed was reluctant to raise rates on Thursday. Many believe that too much reliance on central bank stimulus has put the global economy into a precarious position in which many central bankers have painted themselves into a corner.