The Rising Influence of Rising Affluence

[ilpapa]

WSJ, interesting, the dog didn't bark.

WRAP: The most striking element in Wednesday’s statement from the Federal Reserve accompanying an otherwise widely expected decision to cut $10 billion from its monthly bond-buying program was its utter silence on the recent turmoil in emerging markets. That has translated into further selling in many developing countries’ currencies Thursday and drawn attention to the divide between an improved economic outlook in the U.S. and Europe and a downturn in the emerging-market economies that were previously the leaders in world growth. The latter’s woes were displayed in a downward revision to HSBC’s already weak January purchasing managers index for China.

The Fed’s silence stands in contrast to the extent to which its actions reverberate around the world. Even the Reserve Bank of New Zealand’s decision to hold off on a rate hike today was partly attributed to the impact of the Fed’s decision. If the U.S. central bank is determined to stick to a path of reducing the extraordinary amount of monetary stimulus it has pumped into the world, then those countries that saw giant speculative inflows arise from that liquidity provision will continue to see those flows reverse. That will be painful and could easily create a dangerous contagion effect. It’s a dicey situation for all central banks, including the Fed. (MC)