IMF warns of danger for emerging markets from US interest rate turnaround

Status: 01/10/2022 01:07 p.m.

The International Monetary Fund (IMF) warns against tightening the monetary policy of the US Federal Reserve too quickly. The consequences could be capital outflows and currency devaluations in emerging markets.

Emerging economies threaten to get into trouble if the rate hikes by the US Federal Reserve, or Fed for short, pick up too quickly. The International Monetary Fund (IMF) warns against this.

“Faster rate hikes by the Fed could shake the financial markets and lead to a tightening of financing conditions worldwide,” said a blog post published today by the IMF. This warning applies in particular to the effects on emerging markets, which in this case threatened capital outflows and devaluations of their currencies.

Possible departure from crisis mode

The IMF’s warning was preceded by a decision by the Fed at a December meeting. In view of the high inflation, the move away from crisis mode should be initiated, believe the central bankers. At the same time, the Fed signaled an average of three rate hikes upwards for 2022. The key monetary policy rate could then be in a range of 0.75 to 1.0 percent at the end of the current year. She currently keeps it in a corridor of zero to 0.25 percent.

Some analysts and market observers read from the recently published minutes of the last interest rate meeting that the central bank could even start tightening faster and consider more than three rate hikes. For example, the head of the St. Louis District of the American Central Bank System, James Bullard, had recently considered a rate hike in March.

US inflation rate highest since 1982

The US inflation rate climbed to 6.8 percent in November – the highest value since June 1982. Delivery problems resulting from the Corona crisis, material bottlenecks and almost exploding energy costs drove up inflation.

The IMF sees the danger that if the US wage level rises across the board and the supply bottlenecks persist, prices could rise more sharply than expected. From the perspective of the monetary fund, the Fed should then react to this with faster rate hikes.

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