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 Though the central bank's 16-month-old bond-buying program is meant
to boost the U.S. economy, in the past it has lifted currencies and
stocks in emerging markets that have benefited from a rush of
international investment and the resulting lower interest rates.
Now that the Fed intends to wind down the unprecedented policy
accommodation by later this year, those markets — especially in
countries with large current account deficits — have dropped hard,
prompting policy responses late last week from central banks around
the world.
But the turmoil would probably have to escalate dramatically and
start to hurt the United States for the Fed, focused on domestic
improvements in the world's largest economy, to back down from
trimming the asset-purchase program known as quantitative easing, or
QE.
"When we started QE ... there were many economies and emerging
markets and other places that were very critical of our policy. Now
that we're trying to stop it, they've been very critical of our
policy," Charles Plosser, president of the Philadelphia Fed, said in
a January 14 speech in his hometown.
"We are aware of those things," he added. "But the way the Fed
thinks about it is, if the monetary policy that we have is the best
for the U.S. economy, then that's the policy that we ought to pursue
because a strong U.S. economy would be good for most of the rest of
the world."
Such reasoning is held throughout the ranks of top Fed policymakers,
who are mandated by law to pursue maximum sustainable employment and
steady and low inflation in the United States.
Fed officials privately say they try to be as transparent and
predictable as possible so that U.S. policy changes do not shock
foreign counterparts. And they point out that countries such as
Mexico that better manage their budgets are often unscathed by
investors searching for risky or safe-haven assets, depending on
U.S. policy changes.
NOT FLINCHING
At a meeting that ends Wednesday in Washington, the Fed is widely
expected to trim its monthly purchases of Treasuries and mortgage
bonds to $65 billion from $75 billion, after it made a similar
$10-billion cut at a December meeting.
Fed Chairman Ben Bernanke has said the bond-buying program would
likely be completely wound down by later this year, as long as the
U.S. economy and labor market continue to improve on the back of a
pick-up in growth in the second half of 2013.
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Though the Fed has fairly well telegraphed its intentions, last
spring emerging markets sold off sharply when Bernanke merely talked
of the prospect of reducing QE.
Now that the tapering has begun, the idea of less U.S. stimulus
combined with slower Chinese growth and specific concerns in some
countries led last week to a full-scale flight from emerging-market
assets that could continue this week.
The selloff accelerated on Friday, prompting Argentina to abandon
its support for the peso. The day before, Turkey's central bank
resorted to what analysts said were its first direct interventions
since 2012 in the lira, which hit a record low on Friday.
Central banks of several emerging markets were also believed to have
intervened to defend their currencies including India, Taiwan and
Malaysia.
The selling did not spare stocks in the United States, where the
benchmark S&P 500 index dropped 2 percent on Friday. But, as Dallas
Fed President Richard Fischer said this month, he "would not flinch"
from trimming the bond-buying even in the face of a stock market
correction.
The Fed, which has held interest rates near zero for five years to
battle the recession's fallout, could acknowledge the
emerging-market turmoil in its Wednesday policy statement. But it is
all but certain to continue what Bernanke called "measured" cuts to
the asset purchases.
"It takes a pretty severe downgrading of foreign growth to have a
noticeable effect of the U.S. economic outlook," said Michael Feroli,
chief U.S. economist at JPMorgan.
"Thus far it is not even certain that a few days of international
financial stress is enough to change the global economic prospects,
much less effect the U.S. economy."
(Reporting by Jonathan Spicer; editing
by David Gregorio)
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