The single-most influential variable in the world of financial markets is the base rate of interest in the US. As a result, at the root of all forecasts and planning is the question of when the Fed will hike rates, at what pace will it continue to do so, in what increments and up to what terminal level.

Thinking about this on the flight overnight, I thought of using a planes analogy and see how far it can go. I visualize two planes taking off, one below (and slightly behind) the other. Flight-g on top belongs to Growth & Jobs Air. Flight-y is flown by Aero Fed.

As long as GDP and jobs are on a path of sustainable and efficient growth, there is no problem with rates rising in tandem. In a closed system, matching the slopes of these two is the primary function of central banks. Where growth is struggling, central banks create room by lowering rates. Where growth overheats – think about the plane above generating an excessive amount of exhaust! – central banks might need to overtake (‘get ahead of the curve’) and slow it down.

This joint-scenario of growth and yield is interesting for emerging markets.

In general, EM growth relies on demand from Europe and China. EM cost of funds however, is dependent more on the cost of funds in US dollars. In recent years, EM growth has been consumption & debt-fueled and its responsiveness to global growth (via the trade channel) has been muted. Looking ahead, the two flight-paths run the risk of falling out of sync.

So, what can be done? Well, sometimes you get lucky with weather patterns, perhaps ride a helpful jet-stream. For many emerging economies, low oil prices might act as a tailwind. For some countries – India for example – there is room for domestic rate cuts and to a limited extent, de-linking from the Fed cycle.

You can also get unlucky with the weather – perhaps a geopolitical flashpoint or a secular decline in the commodity that you rely on exporting – in which case the ride can get rough.

In the long run, the only course of action for flight-g is to get lighter, dump some baggage, save energy, perhaps switch off inflight entertainment and ultimately through deploying resources to capex, infrastructure, labour reforms etc., switch to new engines. These new engines, requiring less of the low-grade fuel, will make for a smoother ride.

Arguably, that’s what is happening in the US right now.

This article is published in collaboration with LinkedIn. Publication does not imply endorsement of views by the World Economic Forum.

To keep up with Forum:Agenda subscribe to our weekly newsletter.

Author: Lutfey Siddiqi is a member of Global Agenda Council & ‘New Champions’ Community, WEF.

Image: A man walks past buildings at the central business district of Singapore February 14, 2007. REUTERS.