Will the cheap money era finally end?

No one really expects the Federal Reserve to raise interest rates for the first time since 2008 at its meeting on October 28.

Since its last meeting in September, there's only been a limited stream of fresh economic data to consider. According to Commerzbank economist Bernd Weidensteiner, this is why the guardians of the US currency are likely to keep their options open.

China is probably the Fed's biggest headache. Since summer this year, the world's second largest economy has sent out a number of worrying signals. Rising interest rates could deal a severe blow to some highly indebted regional governments and companies there, dragging down the global economy at large. This is also a concern voiced by the International Monetary Fund (IMF), which has warned of a premature rate hike.

Fearing fresh turbulence

In a globalized world, a key central bank must look at the bigger picture, and not just what is happening inside its own border. It has been plain to see that mere announcements of potential reductions in the Fed's bond-buying program have severely impacted some emerging economies as investors started pulling out some of their money.

"Currencies devaluated in the process, leading to some turmoil on financial markets there," Weidensteiner told DW.

There could be more turbulence ahead, should the Fed indeed decide to tighten its loose monetary policy. According to Weidensteiner, this could mean two things for emerging countries: Firstly, their US-dollar-based debts would increase, with their domestic currencies devaluating; "secondly, we'll probably see a drastic capital outflow jeopardizing domestic investment," he predicted.

Brazil the real problem child

But it is not only China that is at risk, notes Ansgar Belke from Duisburg-Essen University. "China is set to stabilize by the end of the year," he told DW, adding that India also appears to be out of the woods. But when it comes to absorbing rate hike shocks, "other nations such as Brazil are much more vulnerable." As Latin America's largest economy, Brazil is grappling with budget consolidation and a high current account deficit as its gross domestic product (GDP) threatens to stagnate.

Compared to that, China's situation is looking rather comfortable. While, admittedly, it is experiencing a growth slowdown, it doesn't mean there's no growth at all. Last month, China logged a trade surplus of $60 billion (54 billion euros), marking a 12-month high and increasing the country's currency reserves. So, the Fed can't keep using China as an excuse not to raise interest rates, said Commerzbank's Bernd Weidensteiner.

The rate hike debate comes at a time when many central banks across the world have fallen into the habit of further lowering interest rates and expanding unconventional measures such as quantitative easing.

The risk of inactivity

Policymakers and financial market players have gotten used to borrowing money almost for free. The sweet poison of cheap money stands in the way of reforms and numbs investors' risk awareness. There's a growing danger of a gigantic bubble bursting.

And that seems to worry Janet Yellen more than the woes of emerging countries. The US economy is booming, full employment seems in sight. If the Fed's benchmark rate isn't going to be raised now, then when?

Both Weidensteiner and Belke expect the US Federal Reserve to eventually announce a rate hike at its December meeting. But it'll only be a very moderate increase. In other words, the cheap money drug will keep dominating the market for a while longer, but will be administered in smaller doses.