US Federal Reserve rebuffs calls to take the threat of fallout in emerging markets

US Federal Reserve officials rebuffed international calls to take the threat of fallout in emerging markets into account when tapering the monetary stimulus.

The risk that the Fed’s trimming of bond buying will hurt economies from India to Turkey by sparking an exodus of cash and higher borrowing costs was a dominant theme at the annual meeting of central bankers and economists in Jackson Hole, Wyoming, that ended last weekend.

Fed officials said their sole focus is the US economy as they consider when to start reining in $85 billion of monthly asset purchases that have swelled the central bank’s balance sheet to $3.65 trillion. Even as the Fed officials advised emerging markets to protect themselves, they were pressed by the IMF and Mexican central banker Agustin Carstens to spell out their intentions better in the interest of safeguarding global growth.

“It could get very ugly” in emerging economies as the probability of currency and banking crises grows, said economist Carmen Reinhart. “Whenever emerging markets have faced rising international interest rates and softening commodity prices, let us not forget that it has not boded well.”

Central banks of the world’s biggest economies are at various stages of policies aimed at underpinning demand. Bank of Japan Governor Haruhiko Kuroda said his asset buying has “started to exert effects” on the economy, while Bank of England Deputy Governor Charlie Bean said the UK’s pledge to keep rates on hold until unemployment reaches 7% should boost confidence.

Papers presented at the event put the onus on emerging markets to insulate themselves rather than blame larger countries.