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Emerging Risks for Emerging Economies

The US Federal Reserve's pause on further monetary-policy tightening has fueled a revival of capital inflows. But, given the uncertainties about US policy and Chinese growth prospects, it is too early to conclude that emerging economies are out of the woods.

EDINBURGH – Suddenly it seems that emerging-market economies have gained a respite. Capital flows to these economies dried up in the second half of last year as the US Federal Reserve raised its policy rate for five consecutive quarters and shrank its balance sheet. But in January, the Fed announced a pause, which now looks to be extended: the dot plots of Federal Open Market Committee members currently indicate no rate rises for the remainder of the year. Moreover, the Fed has signaled that “quantitative tightening,” the process of allowing treasuries and mortgage-backed securities to roll off its balance sheet, will continue only through September.