Emerging Economies Must Prepare for Fed Policy Tightening by Stephan Danninger, Kenneth Kang and Hélène Poirson
“Policymakers may need to react by pulling multiple policy levers, depending on Fed actions and their own challenges at home.
For most of last year, investors priced in a temporary rise in inflation in the United States given the unsteady economic recovery and a slow unravelling of supply bottlenecks.
Now sentiment has shifted. Prices are rising at the fastest pace in almost four decades and the tight labor market has started to feed into wage increases. The new Omicron variant has raised additional concerns of supply-side pressures on inflation. The Federal Reserve referred to inflation developments as a key factor in its decision last month to accelerate the tapering of asset purchases.
These changes have made the outlook for emerging markets more uncertain. These countries also are confronting elevated inflation and substantially higher public debt. Average gross government debt in emerging markets is up by almost 10 percentage points since 2019 reaching an estimated 64 percent of GDP by end 2021, with large variations across countries. But, in contrast to the United States, their economic recovery and labor markets are less robust. While dollar borrowing costs remain low for many, concerns about domestic inflation and stable foreign funding led several emerging markets last year, including Brazil, Russia, and South Africa, to start raising interest rates…”
