Over the weekend, when commenting on the ongoing rout in emerging markets, Bloomberg published an article titled “Rattled Emerging Markets Say: It’s Over to You, Central Bankers.” Well, overnight the most important central banker of all, Fed Chair Jay Powell responded to these pleas to “do something”, and it wasn’t exactly what EMs – or those used to being bailed out by the Fed – wanted to hear.
As Powell explained, speaking at a conference sponsored by the IMF and Swiss National Bank in Zurich on Tuesday the Fed’s gradual push towards higher interest rates shouldn’t be blamed for any roiling of emerging market economies – which are well placed to navigate the tightening of U.S. monetary policy. In other words, with the Fed’s monetary policy painfully transparent, Powell’s message to EM’s was simple: “you are on your own.”
Arguing that the Fed’s decision-making isn’t the major determinant of flows of capital into developing economies (which, of course, it is especially as the Fed gradually reverses the biggest monetary experiment in history) Powell said the influence of the Fed on global financial conditions should not be overstated, despite Bernanke taking the blame five years ago for the so-called taper tantrum.
“There is good reason to think that the normalization of monetary policy in advanced economies should continue to prove manageable for EMEs,” Powell said, adding that “markets should not be surprised by our actions if the economy evolves in line with expectations.”
Powell’s comments were enough to propel the dollar to new highs…
… in the process slamming the EM complex, which as shown below has been a bloodbath over the past month and explains the escalating rout among emerging markets. Powell’s remarks came amid growing concerns about emerging markets and ongoing dollar strength. As shown above, the dollar has soared against most developing-nation currencies in the past month.
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