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Analysis & opinionOctober 28 2013

The Fed is not the world’s central bank

Emerging markets should focus on building their own resilience to rising US interest rates, rather than blaming the Federal Reserve for their woes.
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When Janet Yellen was nominated last month by Barack Obama to be the next head of the US central bank, she said: “Mr President, thank you for giving me this opportunity to continue serving the Federal Reserve in carrying out its important work on behalf of the American people.”

Her nomination largely went down well. But some policy-makers in emerging markets seemingly wish she had added at the end of that sentence “and the people of Brazil, South Africa, India and any other country with a current account deficit that needs to be funded by portfolio inflows".

The Fed has received plenty of public advice in recent months from emerging market finance ministers – Brazil’s Guido Mantega and South Africa’s Pravin Gordhan among them – about how it should go about ending its quantitative easing programme. Judging by the comments, it would appear as if there are some non-US policy-makers who would go as far as suggesting that the Fed should think of itself as the world’s central bank, not just America’s.

Such an idea – or even the less radical one that the Fed should at least consider the effects of its decisions on other countries – will never become reality, however. To suppose that the US might one day subjugate its domestic monetary policy objectives to international ones is, to put it mildly, far-fetched.

It is in many ways politically convenient for emerging markets to blame the Fed for their woes. It is easy to do and distracts from their own short-comings.

But rather than being fixated with US monetary policy, developing countries should concentrate on the tools at their disposal to counter any threat of sudden outflows from portfolio investors. Those that have acted wisely in the past few years will have built up substantial foreign exchange reserves with which they can protect their currencies, while their central banks can raise local interest rates if necessary.

In the long run, they should address their structural deficiencies so that when the days of cheap money in the US are over, foreign bondholders, instead of rushing for the exit, still want to invest in their economies.

Moreover, it should be remembered that the Fed has no interest in causing havoc in emerging markets. Its aim is to ensure that US interest rates rise smoothly as the American economy picks up, not in sudden bursts. If it manages to achieve this, emerging markets will have little to worry about. It is volatility in the US treasury markets, not rising rates per se, that will hurt them. And volatility is the last thing the Fed wants. What is good for the US remains good for the rest of the world.

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