Fed chair Janet Yellen Yin Bogu/ZumaPress

Emerging Markets After the Fed Hikes Rates

The prospect that the US Federal Reserve will start exiting zero policy rates later this year has fueled growing fear of volatility in emerging economies’ currency, bond, and stock markets. But, with a few exceptions lacking systemic importance, widespread distress and crises need not occur.

NEW YORK – The prospect that the US Federal Reserve will start exiting zero policy rates later this year has fueled growing fear of renewed volatility in emerging economies’ currency, bond, and stock markets. The concern is understandable: When the Fed signaled in 2013 that the end of its quantitative-easing (QE) policy was forthcoming, the resulting “taper tantrum” sent shock waves through many emerging countries’ financial markets and economies.

Indeed, rising interest rates in the United States and the ensuing likely rise in the value of the dollar could, it is feared, wreak havoc among emerging markets’ governments, financial institutions, corporations, and even households. Because all have borrowed trillions of dollars in the last few years, they will now face an increase in the real local-currency value of these debts, while rising US rates will push emerging markets’ domestic interest rates higher, thus increasing debt-service costs further.

But, although the prospect of the Fed raising interest rates is likely to create significant turbulence in emerging countries’ financial markets, the risk of outright crises and distress is more limited. For starters, whereas the 2013 taper tantrum caught markets by surprise, the Fed’s intention to hike rates this year, clearly stated over many months, will not. Moreover, the Fed is likely to start raising rates later and more slowly than in previous cycles, responding gradually to signs that US economic growth is robust enough to sustain higher borrowing costs. This stronger growth will benefit emerging markets that export goods and services to the US.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.

required

Log in

http://prosyn.org/rOLLntf;
  1. An employee works at a chemical fiber weaving company VCG/Getty Images

    China in the Lead?

    For four decades, China has achieved unprecedented economic growth under a centralized, authoritarian political system, far outpacing growth in the Western liberal democracies. So, is Chinese President Xi Jinping right to double down on authoritarianism, and is the “China model” truly a viable rival to Western-style democratic capitalism?

  2. The assembly line at Ford Bill Pugliano/Getty Images

    Whither the Multilateral Trading System?

    The global economy today is dominated by three major players – China, the EU, and the US – with roughly equal trading volumes and limited incentive to fight for the rules-based global trading system. With cooperation unlikely, the world should prepare itself for the erosion of the World Trade Organization.

  3. Donald Trump Saul Loeb/Getty Images

    The Globalization of Our Discontent

    Globalization, which was supposed to benefit developed and developing countries alike, is now reviled almost everywhere, as the political backlash in Europe and the US has shown. The challenge is to minimize the risk that the backlash will intensify, and that starts by understanding – and avoiding – past mistakes.

  4. A general view of the Corn Market in the City of Manchester Christopher Furlong/Getty Images

    A Better British Story

    Despite all of the doom and gloom over the United Kingdom's impending withdrawal from the European Union, key manufacturing indicators are at their highest levels in four years, and the mood for investment may be improving. While parts of the UK are certainly weakening economically, others may finally be overcoming longstanding challenges.

  5. UK supermarket Waring Abbott/Getty Images

    The UK’s Multilateral Trade Future

    With Brexit looming, the UK has no choice but to redesign its future trading relationships. As a major producer of sophisticated components, its long-term trade strategy should focus on gaining deep and unfettered access to integrated cross-border supply chains – and that means adopting a multilateral approach.

  6. The Year Ahead 2018

    The world’s leading thinkers and policymakers examine what’s come apart in the past year, and anticipate what will define the year ahead.

    Order now