IMF believes Fed tightening could have a bigger impact on emerging economies

  • The IMF says the US central bank’s monetary policy measures could hurt emerging economies.

  • Stocks edged down last week as markets reacted to the Fed’s decision to raise interest rates this year.

The markets started the year at a gallop, with strong gains for benchmarks across the board. Tesla, Apple and Ford were among the top performers in this first week of investor optimism, with travel stocks also rising, with concerns over Omicron appearing to have no impact on sentiment.

However, a massive sell-off in the tech sector amid a broader downturn in global markets struck from Wednesday when the U.S. Federal Reserve released the minutes of its December meeting.

According to FOMC minutes, the Fed may be looking to speed up its bankruptcy unwinding program. This has scared the markets as the decline appears to be ending earlier than expected.

The IMF is now warning that emerging markets are likely to feel the impact of multiple Fed interest rate hikes. The monetary body says the Fed tightening presents a scenario in which vulnerable countries could face an even deeper economic slowdown.

Countries in this category include Brazil and South Africa, two of the strongest economies in the bloc with interest rates already raised in the past year.

In one blog post published on January 10, the institution says the impact could be more serious in emerging markets where economies are already suffering from ” high public and private debt “.

The IMF added:

The combination of slower growth and high vulnerabilities could create unfavorable feedback loops for these economies . “

There are also fears that banks in weaker economies will have a tough time in 2022 given huge corporate debt, with weaker banks and digital lenders at risk of going insolvent.

It is worth noting that emerging markets have tended to weaken whenever the US dollar strengthens against other major global currencies. A quantitative tightening by the Fed could therefore lead to a significant jump in capital outflows and a potential depreciation of currencies in emerging economies.

The global lender, however, sees the economic recovery accelerating later in the year and continuing through 2023. However, he predicts that pandemic concerns and a faster Fed tightening process could result in economic turmoil for most emerging markets.

Stocks remain restless

The second week of 2022 sees European markets trading lower during the first trades on Monday.

We have the FTSE 100 Index down 0.1% at the time of writing. The Stoxx 600 was also in the red at 0.17%, while the German DAX was down 0.2%. The French CAC 40 is also down, currently down 0.09%.

As stocks continue to be under downward pressure, yields soar and add to the downward pressure in risky markets. US inflation data due Wednesday could add to the nervousness, analysts said.

Oil and natural gas are up slightly, oil prices are up 0.67% and gas is outperforming at + 5.4%.

Silver prices are up 0.12% to $ 22.43 an ounce, while spot gold is down 0.05% to $ 1,796.8 an ounce.

Bitcoin is up just over 1% as investors look to strengthen above $ 40,000.

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