Earlier this week the Singaporean Finance minister called on the Fed to expand its mandate – potential Fed monetary actions could continue to have a financially unstable effect especially amongst the emerging markets.
During the month of August a trading priority was the liquidation of EM assets. India bore the brunt of rapid capital flight exiting their system and seeking solace mostly in the dollar and dollar assets. The emerging world is doomed to capital-flow instability “unless the Fed takes into account financial volatility in high-growth regions in its monetary policy.”
The Fed cannot act alone – Christian Lagarde and the IMF needs to provide greater guidance on capital controls. Responsibility also lies with Asian policymakers to introduce their own market reforms. This past summer's EM asset sell-off has renewed the debate about how to stabilize emerging financial systems. If they don’t then Australasia “faces a perpetual cycle of credit booms and busts unless the US Federal Reserve looks beyond its employment-inflation mandate and considers the impact of its monetary stance on emerging markets,” according to Singapore’s Tharman Shanmugaratnam.
It’s a fine balancing act that the Fed has to deal with. They have never been here before, and turning off the liquidity tap too soon will only stifle what little growth policy makers have worked so hard to achieve – and potentially drag the emerging economies with them.