Home > IMF warns emerging economies as Fed policy weighs on global markets

IMF warns emerging economies as Fed policy weighs on global markets

  • The IMF says the US central bank’s monetary policy actions could hurt emerging economies.

  • Stocks edged lower last week as markets reacted to Fed’s policy decision on raising interest rates this year.

Markets saw the year start off at a canter, with major gains for benchmark stock indexes across the board. Tesla, Apple, and Ford were among top performers in that first week of investor optimism, with travel stocks also in the ascendency as concerns about Omicron appeared not to impact sentiment.

However, a sell-off in the tech sector amid a broader slowdown in global markets hit beginning Wednesday when the US Federal Reserve released minutes of its December meeting.

According to the FOMC minutes, the Fed could look to accelerate its balance-sheet unwinding program. This has markets spooked as the tapering looks to end sooner than expected.

The IMF now warns that emerging markets are likely to feel the impact of the Fed’s multiple interest rates hikes. The monetary body says Fed’s tightening presents a scenario where vulnerable countries could face even more economic slowdown.

Countries in this category include Brazil and South Africa, two of the stronger economies within the block to already raised interest rates over the past year.

In a blog post published on 10 January, the institution says the impact could be more severe in emerging markets where economies already suffer from “high public and private debt.”

The IMF added:

The combination of slower growth and elevated vulnerabilities could create adverse feedback loops for such economies.”

There are also fears banks in weaker economies could see a rough time in 2022 given the huge corporate debt, with weaker banks and digital lenders likely to go insolvent.

It’s notable that emerging markets have tended to weaken whenever the US dollar strengthens against the other major global currencies. A quantitative tightening by the Fed could therefore see a significant jump in capital outflows and potential currency depreciation in emerging economies. 

The global lender, however, sees economic recovery picking up later in the year and continuing into 2023. However, it projects that pandemic concerns and a faster Fed tightening process could lead to economic turbulence for most emerging markets.

Stocks remain choppy

The second week of 2022 sees European markets trading lower in early deals on Monday.

We have the FTSE 100 index down 0.1% as of writing. The Stoxx 600 is also in red at 0.17%, while Germany’s DAX has dipped 0.2%. France’s CAC 40 is also down, currently 0.09% lower.

While stocks continue to see downside pressure, yields are soaring and adding to the downward pressure in risky markets. US inflation data expected on Wednesday could add to the jitters, according to one analyst.

Oil and natural gas are edging higher, with oil prices are up 0.67% and gas is outperforming at +5.4%.

Silver prices are up 0.12% to $22.43 per ounce, while spot gold is down 0.05% to $1,796.8 per ounce.

Bitcoin is up just over 1% as investors look to strengthen above $40,000.

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