martes, 4 de febrero de 2014

martes, febrero 04, 2014

Why emerging markets are unlikely to sway the Fed

February 2, 2014 9:00 pm

by Robin Harding


After the Reserve Bank of India’s Raghuram Rajan took the Fed and other developed country central banks to task this week for ignoring turmoil in emerging markets, Richard Fisher, president of the Dallas Fed, gave the standard retort on Friday. He said the US central bank must make policy according to what is best for America.

Doing so means the only reason the Fed would change its monetary policy is if trouble in emerging markets had a direct effect on the US. There are two main channelsexports and financial markets – but neither looks likely to hurt the US unless the EM turmoil gets a lot more severe. Thus while the Fed may make a greater show of consultation, and soak up some flak at the G20, its actions this year are unlikely to change.


Exports


If interest rate rises drove big emerging markets into recession, then that would hit US exports, but any plausible effect is very small. A proper estimate needs a big equilibrium model, because you have to consider currency and feedback effects, but you can get a pretty good idea just by looking at where most US exports go.


RankCountryExportsPercent of Total Exports
Total, All Countries1,448.2100.0%
Total, Top 15 Countries1,033.671.4%
1Canada277.019.1%
2Mexico208.214.4%
3China108.97.5%
4Japan59.94.1%
5United Kingdom44.03.0%
6Germany43.83.0%
7Brazil40.42.8%
8Netherlands39.32.7%
9Hong Kong38.82.7%
10Korea, South37.62.6%
11France29.22.0%
12Belgium29.12.0%
13Singapore28.32.0%
14Switzerland25.51.8%
15Australia23.71.6%


The only member of the ‘Fragile Five’ to make the Top 15 is Brazil. Brazil buys 2.8 per cent of US exports. Meanwhile, exports equal only 13 per cent of US output. Thus exports to Brazil amount to less than 0.4 per cent of the US economy.

It quickly becomes clear that only a very broad emerging market slowdownone that included China or Mexico, for example – would have much effect on US exports. It remains the case that a US recession can plunge the rest of the world into an export crisis; there are not many countries that can have the same effect on the US.

Financial Markets

A more plausible way for an emerging market shock to hit the US is via financial markets. Corporate America earns a good share of its profits from emerging markets. The Asian financial crisis in 1997 and the collapse of Long-Term Capital Management in 1998 show how financial shocks from emerging markets can quickly hit Wall Street.

But as Capital Economics point out, both the Asian crisis and LTCM had short-lived effects on US stocks, and the S&P 500 ended up rising by around 25 per cent in both of 1997 and 1998.




The effects have been similarly modest so far in 2013 and 2014. The S&P 500 is less than 4 per cent below its all time high. A deeper EM crisis could mean greater losses for US banks and investors but so far there is hardly an effect on financial conditions that would justify a change of Fed policy.


Flight to Safety?


So far the troubles in emerging markets, far from being a drag on the US economy, have if anything been a net stimulus. That is because ten-year bond yields have fallen. It is hard to know whether that reflects capital flight to US Treasuries or merely a little less optimism about the US growth outlook. Either way, it loosens financial conditions in the US.




An emerging market crisis could end up influencing the Fed sometime this year. But it would have to become much more of a crisisrather than just the wobbles we have seen so far – to activate these channels and thus endanger the US economy.

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