Emerging markets struggling with higher interest rates are likely to get little sympathy from the Federal Reserve.
Currencies of such nations have been hammered in a spreading sell-off amid worries that their economies won’t cope with higher U.S. borrowing costs. That’s prompted central bankers in India and Indonesia to raise interest rates and urge Fed caution, with Turkey on Thursday also delivering a surprise hike to defend the lira.
There are few signs such concerns will steer the Fed away from its course for at least two — and possibly three — more rate increases this year, including a move at its policy meeting next week.
Chairman Jerome Powell explicitly pushed back against criticism early last month in Zurich, saying the role of U.S. monetary policy on foreign domestic financial conditions was “often exaggerated.” Board of Governors member Lael Brainard mentioned emerging markets in a May 31 speech, but spent far more time discussing the upside risks posed by fiscal stimulus.
“I don’t think they can change policy based on fear,” said Bricklin Dwyer, senior economist at BNP Paribas in New York. Emerging-market turmoil “is noise right now, justifiable noise. But does it shift the outlook for the U.S? The answer is, not yet.”
The U.S. economy is powering ahead, adding over a million jobs in the first five months of 2018. Inflation is at the central bank’s two percent target.
The Atlanta Fed’s gross domestic product tracking model suggests the economy grew a strong 4.5 percent in the second quarter.
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The Fed is tasked with achieving stable prices and full employment. At 3.8 percent in May, unemployment is already well below estimates of full employment and recent forecasts show officials expect a modest overshoot of their two percent inflation target.