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Emerging economies must brace for Fed tightening policy - IMF

By Abigail Townsend

Date: Monday 10 Jan 2022

Emerging economies must brace for Fed tightening policy - IMF

(Sharecast News) - Emerging markets should prepare for heightened turbulence as the US Federal Reserve tightens policy, the International Monetary Fund has warned.
In a blog post, the IMF said US growth was expected to remain robust, with inflation moderating later in the year as supply disruptions ease.

"Should policy rates rise and inflation moderate as expected, history shows that the effects for emerging markets are likely benign if tightening is gradual, well-telegraphed and in response to a strengthening recovery," it said.

"Even so, spill-overs to emerging markets could be less benign. Broad-based US wage inflation, or sustained supply bottlenecks, could boost prices more than anticipated and fuel expectations for more rapid inflation."

The IMF said that should the Fed move faster than currently expected, financial markets could be rattled and financial conditions globally could tighten.

"These developments could come with a slowing of US demand and trade, and may lead to capital outflows and currency depreciation in emerging markets."

This scenario could prove more severe for "vulnerable" countries, the IMF warned. "The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies."

The IMF therefore urged emerging economies to take steps now to strengthen policy framework and reduce vulnerabilities, including containing inflation pressures, while countries with high levels of debt denominated in foreign currencies should "look to reduce those mismatches and hedge their exposure wherever feasible".

Heavily-indebted countries may also need to start fiscal adjustment "sooner and faster", it said.

The blog concluded: "While the global recovery is projected to continue this year and the next, risks to growth remain elevated by the stubbornly resurgent pandemic. Given the risk that this could coincide with faster Fed tightening, emerging economies should prepare for bouts of economic turbulence."

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