Long-sought US taper hits emerging economies

Emerging markets have spent the last five years demanding a tighter monetary policy from the developed world. Now it is happening, and one conclusion of the Kansas city Fed's annual gathering in Jackson Hole, Wyoming, is to be careful what you wish for.

The Jackson Hole symposium is normally dominated by US Federal Reserve policy, but with chairman Ben Bernanke absent this year, the effects of Fed policy on the rest of the world took centre stage.

Fed signals that it will soon start to taper down its $85 billion (€63.5 billion) a month in asset purchases, marking the beginning of the end for its easiest monetary policy, have pushed up long-term interest rates in the US.

That has led to a flow of capital out of developing countries such as India, Brazil and Indonesia, with accompanying falls in exchange rates. The view among policymakers was there is more pain to come but developing countries will survive it.

"The sell-off, including renewed pressure in recent days, remains within the range of other sell-offs which the emerging markets have successfully weathered in recent years," said Terrence Checki of the New York Fed.

But he said there may be more volatility when the US throttles back on monetary easing and investors suddenly pay attention to the fundamentals of countries.

It was hard for emerging economies to complain too much about the Fed’s talk of tapering since that is what they have spent years asking for.

"I think, in any event for us, the process of exit is a welcome transition to more normal global monetary policy conditions," said Luiz Awazu Pereira da Silva, deputy governor of the Banco Central do Brasil.

The puzzle, he noted, is why there was so much market turmoil from events so well-expected.

With cheap capital flowing in, some emerging markets failed to run a disciplined economic policy, or carry out reforms to boost future growth.

IMF defence
The most positive message came from Christine Lagarde of the International Monetary Fund, who said the world needs to build "further lines of defence" against an emerging markets crisis. As such markets wobble, with the Fed's taper on the horizon, IMF support may yet be needed. – (Copyright The Financial Times Limited 2013)