Fed tightening no longer spells doom in today’s emerging markets

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Emerging markets look better-placed to weather any storm. Many have built up foreign-exchange reserves in the past decade. Those that produce commodities can sell their output at surging prices. Moneyweb Economy

Inflation hawks are about to get what they want from the Federal Reserve — which means emerging markets are about to get what they’ve traditionally feared. The prospect of higher US interest rates, which the Fed is promising to deliver this year and next, has typically been a recipe for trouble in developing economies, especially when it results in a stronger dollar. The so-called taper tantrum of 2013 and Mexico’s 1990s crash stand out in the history books.

Interest rates are low in both advanced and developing countries, meaning there’s room for them to rise before credit gets severely pinched. And Reinhart points to the commodity boom under way since 2020, which contrasts with the slump in the middle of last decade. “For emerging markets, there are not two shoes, there’s three,” she says. “There’s international interest rates, international capital, and commodity prices. Higher commodity prices help a great deal.

 

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