As we explained earlier, this week’s Fed meeting is one of the most hotly anticipated Fed meetings in a long time. The recent increase in interest rates and growing talk about the Fed “tapering” its pace of bond purchases has everyone eager to parse every word in the Fed statement, and Bernanke’s post-meeting press conference. And it’s not just domestic investors who are concerned. The entire world is watching. And for good reason.
In an interview with WSJ, a member of Hungary’s central bank explains why the Fed matters from the perspective of his country:
Hungary’s central bankers are worried that any rapid scaling back of easy-money policies by the U.S. Federal Reserve could lead to an abrupt spike in government borrowing costs, weaken the local currency and force an end to their campaign of interest-rate cuts, a bank rate-setter said.
A sudden move by the Fed and other major central banks “would be dangerous and very unfavorable for markets,” said Gyula Pleschinger, a member of the National Bank of Hungary’s monetary-policy council in an interview with The Wall Street Journal.
What Pleschinger is worried about is a story that’s already playing out in emerging markets all around the world.
The US has seen a rise in real interest rates lately (in part thanks to expectations that the Fed will ease up on the gas pedal) and that’s caused strengthening of the US dollar against emerging market currencies. Emerging market currencies have been bludgeoned, and that’s forced emerging market central banks into some unwelcome decisions. For example, at the end of last week, Indonesia’s central bank was forced to raise interest rates to prevent the flight of capital.
And as Pleschinger is worried about, interest rates on government debt around the emerging world have been spiking, as money flows out of their economies, back to the US.
So the next US rate move is a huge deal. If there’s a sense that the Fed is going to actually go down the path of tightening, or at least loosening at a less-quick pace, the flow of liquidity (which once rushed generously to the emerging world during the good ol’ QE days) will continue to reverse, sapping these countries of much needed dollars, significantly constraining their ability to act.
Business Insider Emails & Alerts
Site highlights each day to your inbox.