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U.S. Central Bank Indecision Driving Emerging Market Recovery

Federal Reserve backs itself into a corner after failure to raise rates

The Federal Reserve sent shockwaves through the emerging markets by announcing the end of its quantitative easing program in the summer of 2013. The resulting ‘taper tantrum’ did not teach the central bank a lesson in the impact that its announcements may have on global markets. At the time, American policy makers were incredulous and blamed investors from overreacting.

Rate Divergence Expectations Driving U.S. Dollar, But for How Long?

The Federal Reserve is facing an erosion of confidence as rhetoric alone has not been enough to keep pushing the U.S. dollar higher. The dollar has appreciated considerably since the announcement to end quantitative easing unleashed a ‘taper tantrum’. Gains in the American currency have quickly been given back as the difference between the U.S. federal funds rate and other benchmark interest rates remain unchanged even after all the talks of an imminent rate hike.

Emerging Market Central Banks Call for Action, Not Talk

Central bankers from India, Indonesia, Mexico and Peru have gone against the tide and suggested to the Federal Reserve that it should hike benchmark interest rates sooner rather than later. This goes in the face of warnings from the International Monetary Fund and the World Bank, as both organizations have urged Federal Reserve Chair, Janet Yellen to take raising rates out of the agenda for the remainder of the year. The emerging market policy makers, however, see no reason to wait, as it is the indecision from the U.S. central bank that has caused increased volatility in global capital markets.

It is no coincidence that the governors of central banks in India, Indonesia, Mexico and Peru are asking the Federal Reserve to act now. They have the right mix of economic fundamentals to keep growing in the face of macroeconomic headwinds. The U.S. economic indicators continue to weaken, making more than a token 25 basis points hike a slim probability, which will only tip the benchmark interest divergence scale marginally. Right now the U.S. central bank has overused its best monetary policy tool by sending mostly hawkish signals which drive the U.S. dollar higher, only for it to crash down after key economic indicators disappoint.

Reforms and Stability the Key to Resilience

Emerging market nations that share common trends of political reform and show a willingness to adapt their economic models to current conditions are in a good position to reap the benefits of the current global environment. What can be a curse from some countries may be a benefit for others. Case in point, oil exporters are struggling given the drop in demand versus the record high supply of crude. However, net energy importers like India are seeing a positive reduction in inflation with a chance to increase

productivity without incurring in higher costs. There are many nations that import energy, but the list is shortened when political reform comes into play. India’s willingness to adapt can be the extra step needed to unlock global opportunities in times of major, central bank driven, uncertainty.

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