The IMF’s Next Test

With the Fed considering a QE exit and interest-rate hikes in the next year, global markets are set to experience significant turbulence. Rather than waiting for a crisis to develop before intervening, the IMF should provide “forward guidance” on how it will mitigate looming volatility.

CAMBRIDGE – In October, central bankers, policymakers, private-sector executives, academics, and representatives of civil-society organizations will convene in Washington, DC, for the annual joint meeting of the International Monetary Fund and the World Bank. Among the most important outcomes this year will be the IMF Board of Governors’ decision regarding how to address current international monetary issues.

Global economic conditions remain precarious, with no signs of healthy GDP growth in the eurozone, a weak recovery in the United States, commodity-exporting countries like Australia suffering from diminishing Chinese demand, and an emerging-market slowdown that is now well into its third year. In such an uncertain environment, even small changes in advanced countries’ monetary policy can destabilize developing economies.

For example, the mere announcement in May that the Federal Reserve would “taper” its purchases of long-term assets drove down the value of emerging-market currencies. With the Fed considering exiting its quantitative-easing policy altogether and raising interest rates over the next year, global markets are set to experience significant turbulence.

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