Wall Street Journal: US Fed Reluctance to Cut Rates Makes Easing Harder for Emerging Markets

Industry

Washington, The monetary policy pursued by the US Federal Reserve is casting its shadow on global markets, including emerging market, after the US central bank's recent decision to keep high interest rates unchanged. Federal Reserve Chairman Jerome Powell had previously acknowledged the impact of US monetary policy on global markets, despite noting that the current cycle does not cause the same amount of turmoil as previous cycles. The Wall Street Journal said that "Central banks in Brazil and Mexico that led the global fight against inflation could now be stuck with steep interest rates due, in part, to the US Federal Reserves reluctance to cut." The Fed left the federal funds rate unchanged at 5.25% to 5.5%, pointing out that it is unlikely to cut before economic data show inflation is moving toward the central banks 2% target. In a report, the newspaper explained that emerging-market central banks managed to tame price increases by raising borrowing costs much earlier and higher than their peers in the developed world. But the Feds decision to keep rates at high levels is curbing their ability to loosen financial conditions, weakening their currencies and could hamstring their economies if borrowing costs take longer to fall. Chief Latin America economist for Goldman Sachs in New York Alberto Ramos said that as the Fed delays rate cuts, it would leave a lot less wiggle room for these banks and they may need to reduce the pace of monetary easing. Global investors tend to move dollars out of riskier countries and into US assets unless the difference between their respective interest rates is wide enough to compensate for the added risk, the Wall Street Journal pointed out. Brazils central bank will meet to decide on rates on Wednesday, followed the next day by its Mexican counterpart. Brazils central bank has indicated it would cut rates by a half percentage point for the seventh consecutive time, but domestic problems and delayed Fed cuts is supporting forecasts that the central bank would slow the pace of easing. "While Brazil and Mexico are seeing economic output grow this year, in part due to government stimulus, tight Fed policies could be a headwind for their economies," the newspaper said. The Brazilian real has weakened more than 4% this year against the dollar as the outlook for the Fed pivot changed. The Mexican peso has retreated around 3.5% from a nearly nine-year high reached in April. Meanwhile, Indonesias central bank is "ready for the worst" and will provide more support for the rupiah if needed, the head of its monetary management department has said, according to the Financial Times. The monetary departments executive director Edi Susianto told the newspaper that the Bank Indonesia was prepared to intervene in the currency market, as it did last month when the rupiah hit multiyear lows, but would not rely solely on intervention. Japan and Vietnam also intervened to support their currencies, while the central banks of Malaysia and South Korea have said they are prepared to do so. Sourc e: Qatar News Agency