NEW YORK: Emerging markets struggling with higher US interest rates are likely to get little sympathy from the Federal Reserve.

Currencies of such nations have been hammered in a spreading sell-off amid worries that their economies won’t cope with higher US borrowing costs. That’s prompted central bankers in India and Indonesia to raise interest rates and urge Fed caution, with Turkey on Thursday also delivering a surprise hike to defend the lira.

There are few signs such concerns will steer the Fed away from its course for at least two and possibly three more rate increases this year, including a move at its policy meeting next week.

Chairman Jerome Powell explicitly pushed back against criticism early last month in Zurich, saying the role of US monetary policy on foreign domestic financial conditions was “often exaggerated.” His colleague, Governor Lael Brainard, mentioned emerging markets in a May 31 speech, but spent far more time discussing the upside risks posed by fiscal stimulus.

“I don’t think they can change policy based on fear,” said Bricklin Dwyer, senior economist at BNP Paribas in New York. Emerging-market turmoil “is noise right now, justifiable noise. But does it shift the outlook for the US? The answer is, not yet.”

The US economy is powering ahead, adding over a million jobs in the first five months of 2018. Inflation is at the central bank’s two per cent target, and the Atlanta Fed’s gross domestic product tracking model suggests the economy grew a strong 4.5pc in the second quarter.

Even if exports are tempered by foreign economic woes, trade fights, and a somewhat stronger dollar, some $1.5 trillion in fiscal stimulus and a $300 billion increase in federal spending are supporting domestic US demand with “a huge tailwind,” said Torsten Slok, chief international economist at Deutsche Bank in New York.

The Fed is tasked with achieving stable prices and full employment. At 3.8pc in May, unemployment is already well below estimates of full employment and recent forecasts show officials expect a modest overshoot of their 2pc inflation target.

Meanwhile, the Fed’s benchmark lending rate is still low enough to stimulate growth, according to some measures, leaving officials with little choice but to keep raising it to a level that is more neutral in its impact on supply and demand.

US policymakers have also gone out of their way to communicate the plan for gradual rate increases and a shrinking balance sheet to avoid repeating the 2013 taper tantrum, when then-Fed Chairman Ben Bernanke surprised investors by suggesting the central bank might slow bond purchases.

Delaying policy tightening could also carry costs for emerging markets if it led to higher inflation that forced the Fed to act more aggressively, said Nathan Sheets, chief economist for PGIM Fixed Income.

“The Fed’s got to move,” said Sheets, a former US Treasury undersecretary for international affairs. Officials are probably asking themselves, “over time, are we going to serve the global economy well by not responding to inflation?”

There have been occasions in the past when the Fed has paused in response to international developments. In 1998, for example, then-Chairman Alan Greenspan led the committee to cut rates three times to offset effects of spreading financial turmoil.

Greenspan warned during that period that “it is just not credible” that the US remain “an oasis of prosperity.”

“He was wrong,” said Joe Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington and a former Fed economist. “He eased 75 basis points and the economy, if anything, accelerated and the tech economy really took off.”

The bubble in technology stocks eventually burst at high cost to the US economy.

In 2016, Fed officials set aside plans to raise rates four times over the year in reaction to financial-market turmoil triggered by concern over slowing Chinese growth. They hiked just once, but could also point to US inflation that was running too low as a reason for their caution.

The Fed’s preferred gauge of price pressures averaged just 1.2pc that year, while it hit 2pc on a 12-month basis in both March and April 2018.

Fed officials do have an eye on Europe and emerging markets, “but at the end of the day, look at the employment report” in May, when the US economy added 223,000 jobs, said Deutsche Bank’s Slok. “If anything, we should be worried about overheating, not a recession.”

Published in Dawn, June 9th, 2018

Follow Dawn Business on Twitter, LinkedIn, Instagram and Facebook for insights on business, finance and tech from Pakistan and across the world.

Opinion

Editorial

Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...
New terror wave
Updated 27 Mar, 2024

New terror wave

The time has come for decisive government action against militancy.
Development costs
27 Mar, 2024

Development costs

A HEFTY escalation of 30pc in the cost of ongoing federal development schemes is one of the many decisions where the...
Aitchison controversy
Updated 27 Mar, 2024

Aitchison controversy

It is hoped that higher authorities realise that politics and nepotism have no place in schools.