High alert to Fed’s ultra- loose policy
Forecasts over emerging economies have shown a notable change as they witnessed vaccination progress much slower than advanced countries, while the developed economies, especially the US, have been accelerating expansionary fiscal and financial policies which are believed to trigger a vicious circle for the emerging markets in the coming time, and these countries need to be alert to the risks.
Though IMF recently raised the economic forecast for Asia- Pacific region to “above 7.5 percent this year,” Jonathan Ostry, an official from IMF, warned that “if US bond yields rise faster than markets expect, or if there is miscommunication about future US monetary policy, adverse spillovers through financial channels and capital outflows, as during the 2013 taper tantrum, could present challenges
[ to the region] by compromising macro- financial stability.”
And, JPMorgan even recommended selling emerging market currencies on Tuesday, completing a 180- degree reversal from the start of the year when it was backing them to have a good run, Reuters reported.
As the rich economies are speeding up vaccine inoculation, they may reach herd immunity faster than less developed nations, experts say.
To reboot the economy, the US President Joe Biden has been refueling America’s expansionary fiscal policy by pushing mega stimulus packages since his inauguration, and more deficit spending is in the pipes.
With such strong stimulus actions, recovery prospect of the US is improving. It will lead to backflow of capital from overseas, for instance, from the emerging markets which lately are less satisfactory in their epidemic prevention and vaccination drives. The capital outflow risks faced by the emerging economies, will pose rising pressure on their currencies, promoting the countries to tighten monetary policy, which, in turn, would depress their economic growth – a looming vicious circle.
In the meantime, with improving economic fundamentals, rising inflation expectation and increasing concerns over a possible monetary policy change of US Federal Reserve, the US Treasury bond yields have been climbing. Coupled with Biden’s raising corporate tax plan, all these factors will add pressure on the US stock markets which have shown signs of bubble.
If any correction emerges in the US stock market, the fallout may spill over to the whole world, and many emerging markets will bleed.
On the other hand, the scenario faced by emerging markets is to some degree different from pervious global risks, such as the 2008 financial crisis. Those developing economies that have relatively strong manufacturing ability are expected to recover faster, while those relying heavily on resource exporting may face a more sluggish recovery pace.
As for China, with its speedy containment of the virus, its manufacturing sector is booming and exports are skyrocketing, fueling up its economic growth. Though the driving power of manufacturing sector may decrease as overseas factories gradually resuming, the Chinese economy will remain resilient relying on domestic demand.
Coming back to the US, ultra- loose Fed policies may help the American economy to recover more quickly, but it also creates graver risks for its capital market. A bust of the US market is likely to bring down many emerging markets.