What The Fed Pause Means For The Emerging Markets

The U.S. Federal Reserve yesterday left interest rates unchanged but indicated it continue increasing borrowing costs amid “strong” growth". The Fed retained its guidance for “further gradual increases”, lining up the third hike of the year that economists expect to come in September.

“The change in language from Fed was interesting, making it almost certain that there will be a rate rise in September,” Manulife Asset Management's Geoff Lewis said. “We believe that U.S. Fed is on track to keep on hiking interest rates,” Lewis told BloombergQuint, adding that 2019 will be interesting due to the divergence that Federal Reserve does and what the market believes.

Hao Zhou, senior emerging markets economist at Commerzbank, said the December hike is on the table and he expects another two next year.

Higher rates in the U.S. prompt foreign funds to withdraw money from emerging markets as they get higher return at a lower risk.

Lewis, however, believes the sell-off is coming to an end. “The worst of emerging markets not performing has been seen, unless there are further adverse developments on the trade friction front,” he said.

Zhou differs. “Emerging markets will be under pressure as economic growth could be impacted due to continued tightening that we are likely to see,” he said. “The emerging markets would then have to hike interest rates to prevent capital outflows.”

Last month, U.S. President Donald Trump lashed out at Jerome Powell-led committee, stating that he wasn’t thrilled with increasing interest rates. Lewis, however, doesn’t think the White House is trying to undermine the Fed’s independence.