View: Emerging markets will soon step out of the Fed’s shadow

Daniel Moss

Gloom is dissipating for emerging markets, and they can thank American influence. There’s a lesson there, and a payoff.

With the Federal Reserve approaching a pause in its interestrate increases, pressure on nations like Indonesia will lighten significantly. No longer will they have to hike interest rates to buttress local currencies; they may conceivably get scope to cut. That’s a big change, one that gets attention in Morgan Stanley’s outlook for 2019.


This shift underscores an underappreciated fact. For all the talk of ‘decoupling’ and America’s decline, this optimistic scenario for emerging markets is dependent on the Fed. As I wrote here and here, the developing world doesn’t yet control its own fate.

The bullish case for emerging markets rests in part on comments from top Fed officials and in part on arithmetic. Chairman Jerome Powell and Vice Chairman Richard Clarida sounded mellower this month. The Fed’s projections suggest a few more quarter-point steps to near one measure of neutrality. A good time to open the bunker and peer about.

Compared with the boost a Fed breather would bring, China’s efforts to cushion its domestic slowdown won’t deliver the same pop.

Yes, China’s gross domestic product will surpass the US in the coming decade; yes, China’s sway in Asia is increasing; and, yes, the trade conflict between Washington and Beijing will reverberate for years. But we live in a unipolar monetary system. The dollar is still the currency that really matters.

A lot of ink gets spilled over Brexit, but its impact on the rest of the world is hard to quantify. The European Central Bank will remove some accommodation, and there’s a chance the Bank of Japan moves beyond negative rates next year. Like other currencies’ moves, these prospective happenings will have marginal influence compared with a change in tides at the Fed.

That’s the lesson. Now, the payoff: Those countries that did the right thing and responded to the emerging-market slide of 2018 with sober, realistic policy adjustments stand to reap the benefits.

The International Monetary Fund commended Indonesia for its textbook efforts to combat the slump.

They were also conventional: raise rates, trim spending, some import curbs and identifying industries that could use more foreign investment.

Doing good also means resisting bad habits. Top Indonesian officials didn’t waste time talking about sketchy cabals or “interest-rate lobbies,” as did Turkey. Nor did Bank Indonesia spring massive surprises like pumping rates up to 40% or beyond, like Argentina. There were no unseemly public fights between the cabinet and the central bank, as India has endured.

Sometimes doing the right thing does matter, even if its fruits aren’t apparent in the moment. For those that followed the rules and played the game, 2019 might be the year of reward.