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Emerging Markets Will Be in Flux, No Matter What the Fed Does

The merest hint from Jerome Powell that he’s ready for a breather would have emerging-market investors turning cartwheels. 

Emerging Markets Will Be in Flux, No Matter What the Fed Does
Jerome Powell, chairman of the U.S. Federal Reserve, speaks during a House Financial Services Committee hearing in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)

(Bloomberg Opinion) -- The merest hint from Jerome Powell that he’s ready for a breather would have emerging-market investors turning cartwheels. Unfortunately, it wouldn’t solve every problem.

An indication from the Federal Reserve chairman that the steady quarter-point climb in U.S. interest rates is nearing a pause would be an opportunity for those investors to pick up some assets. The whiff of crisis in the developing world would dissipate.

Dissipate, but not disappear. U.S. rates siphoning investors away from emerging markets was only one problem; easing that will be no panacea. Better to think of a Fed shift as a necessary, but insufficient, step toward the all-clear signal.

Troublesome politics and miscued policy would remain in places like Turkey, Argentina and South Africa, points out Federico Kaune at UBS Asset Management. Then there’s trade.

The tariff clash between the U.S. and China threatens to upend supply chains built up over decades, especially for countries that rose to power as low-cost producers or assemblers of components. Those chains steered direct investment, manufacturing, higher living standards and education. In some ways, the supply chains fostered the global middle class.

But something has shifted in the way people think about trade. When trade is being discussed as a zero-sum game with winners and losers, it’s hard to envision a return to the halcyon days of globalization, regardless of when Donald Trump departs the scene.

No wonder markets hang on every hint from the Fed. Dot plots, forecasts and forward guidance are easier to grasp — that was the point — than intangibles like the president’s trade agenda or Asia’s evolution toward a new economic model.

Barring a calamity, Fed rates are going up on Sept. 26. I have no idea whether Powell or the Federal Open Market Committee will indicate then that a pause is in the offing. The Fed’s own published projections do suggest rates are closing on a level that neither restricts nor stimulates the economy. The chairman is likely to be asked about it at his press conference following the conclave in three weeks.

Investors will be listening closely. Slower U.S. rate increases would give emerging markets a reprieve, but it would be a pity if that deferred hard thinking about trade wars’ impact on economic models, especially in Asia. Even détente in the U.S.-China spat would not erase these dynamics.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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