Tag Archives: tapering

Looking into unemployment in US

Since Federal Reserve’s tapering took place in the beginning of 2014, I was concerned if it could maintain its desired unemployment rate of 6.5% and inflation rate of 2% in my previous blog post Federal Reserve’s decision – tapering. April has arrived (it is hard to believe that more than 1/4 of 2014 passed already!), and data shows that the US economy is in the process of recovery from its recession from 2010.

I plotted the unemployment rate from 2008 to 2014, using FRED : Federal Reserve Economic Data website. From this graph, I could see a high increase in unemployment rate from mid 2008 to 2010 (from 4.9% to 10%), when the international economy was in a turmoil due to worldwide recession. With efforts such as quantitative easing and other monetary/fiscal policies, unemployment rate has been decreasing steadily to 6.7% as of March 2014. From the graph, it could be observed that since the tapering by Federal Reserve started in 2014, unemployment rate has been steady at 6.7%, just above the Federal Reserve’s target of 6.5%. Therefore, one could say that Federal Reserve’s tapering in 2014 was a right decision, not overstimulating the economy yet still meeting its economic goals.

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However, regardless of this positive economic data there is a downside. Wall Street Journal article Five Years of Declining Unemployment Doing Little to Close Race Gaps points out the downside very well. According to the article, although the unemployment rate has been decreased steadily since October 2009, the unemployment rate gap among the race has not been decreasing much. The graph below shows this gap. Among various races, Asians and white people have relatively lower unemployment rate compared to Black or African American and Hispanic or Latino American. Furthermore, it can be seen that the gap between unemployment rate of Black or African American and White American got even bigger in 2014, compared to 2010 when unemployment rate peaked.

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As we all know, economic growth and decrease in inequality are two important economic goals. It is a good thing that the US economy is getting better, despite Federal Reserve’s decision of tapering in 2014. However, a way to decrease the gap of inequality is still vague to me. Maybe it might be beyond the scope of economists; we are all aware that Asians and White Americans has a higher ratio of college graduate degree, and I think this is the main reason for inequality among various races. I think it is important to create policies that can encourage them to get higher education- something that monetary policies cannot be easily achieved by neither Federal Reserve nor extensive monetary policies.

What Is the Fed Trying to Tell Us?

Janet Yellen held her first meeting as Federal Reserve Chairwoman last Wednesday and released several important updates on the Fed’s exit strategy, prompting significant market reactions.

Update 1: Tapering

The Fed decided to scale back its monthly bond purchases to $55 billion from the current level of $65 billion. The $10 reduction was evenly distributed to mortgage-backed securities and longer-term treasury bonds, with $5 billion in each. Unlike the central bank’s moves in late 2013, this round of tapering was in close line with market’s expectation, given that the U.S economy has shown continuous signs of improvement.

Update 2: Unemployment rate

The Fed once claimed that it would not consider interest-rate increases as long as the unemployment rate was above 6.5%. As the indicator was approaching the threshold (6.7% in February), the central bank altered its guidance about the likely path of short-term interest rates by lessening the weight on the unemployment rate as a signpost for when rate increases will start.

Specifically, Ms. Yellen argued that the Fed would look at a broad range of economic indicators for tapering down the line, including the share of workers who have been unemployed for six months or more, the share of adults who are holding or seeking jobs, the portion of workers who hold part-time jobs but say they would rather have full-time occupations and the rate at which people are quitting jobs.

From my perspective, I think the unemployment rate alone simplifies the reality of the job market due to the ignorance of issues mentioned above. In particular, the retirement of “The Post-World War II baby boom” significantly decrease the pressure of employment, which should also be taken into account when considering labor market policy in the future.

Update 3: Interest Rates

The Fed sent mixed signals on the outlook of interest rates.

In terms of the long-term interest rate, the Fed is committed to keeping it low even after inflation and unemployment return to their normal levels. Since the major goal of the Quantitative Easing was to bring down long-term interest rates so as to stimulate investment, spending, and hiring, I think the Fed should be more prudent in its further tapering decision by adjusting the magnitude of reduction in consistent with economic situations and market trends.

However, the movement of the short-term interest rate triggered instability in the market. Ms. Yellen suggested that interest-rate increases might come about six months after the bond-buying program ends—a conclusion that could come this fall. Consequently, there was a drastic sell-off in the 10-year treasury bonds in anticipation that rate increases might be sooner and more aggressive than expected.

The Fed Ties Interest Rate Raise to the Tapering Instead of Unemployment Rate

Following today’s Fed’s meeting, the meeting statement has been scrutinized by every word to word. Of course, the biggest headline news was the Fed’s move to drop the unemployment rate of 6.5% as a threshold rate for raising interest rate from its meeting statement. Not only are Fed watchers reading the statement literally word to word, but also some of the policymakers at the Fed worried that some paragraphs of the statement might stir the market to a wrong way. To be more precise, Minnesota Fed President Narayana Kocherlakota was the only voting member who voted against the Fed’s decision to remove the key number of 6.5% from the statement. He says that the a paragraph in the statement may signal the Fed’s weakness when it comes to reaching the long-term inflation rate of 2%. The paragraph he was referring to is following:

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored [emphasis added].

It seems like the last sentence could have caused Mr. Kocherlakota to vote against the action because of it’s  possible inference of a lasting low inflationary period. As low inflation has continued since 2012, inflation expectation, also, hasn’t been reaching the goal of 2%. The expected inflation in 10 years is still lower than 2%. The following graph provided by the Cleveland Fed shows the market’s expectation of inflation in certain time horizons :
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Considering the low expected inflation in next few years, Mr. Kocherlakota’s worry of weakening the credibility of the Fed’s commitment to the 2% inflation is indeed valid. The Fed’s main goal thorough its forward guidance is to lower the expected interest rate for certain duration, but it’s another goal from which the FED is quite away from reaching it is to raise the inflation expectation, which in turn lowers the real interest  rate and boost investment.

Now let me interpret the Fed’s statement in my way. The WSJ posts an interesting post on how the latest Fed’s statement changed from last month’s. The following passage shows the change made in the statement from last month:

The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percentfor a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent, and provided that longer-term inflation expectations remain well anchored.

As we see from the change made in the statement, the Fed untied the possible date of raising interest rate from the unemployment rate and related it more to the Fed’s tapering process and its ending. Now, the Fed watchers should be giving more weights to the tapering process than before since it is now more related to the raise in interest rate.

This change could be progress forward for the Fed because as the tapering continues for at least throughout 2014, the market will have stronger signal of the Fed’s raising interest rate in near future. Even though then higher expected interest rate might seem worse for the economy, raised expected interest rate could actually induce more investment today, which is opposite to what one might assume. Because, the market will be surely knowing the coming of the raise in the interest rate in few months, firms should take advantage of the low interest rate today by borrowing and investing rather than postponing the investment project. This idea of surely known interest rate increase could create more investment is explained in my one of the previous posts.

 

Fed Meeting: Staying the Course Spooks Markets

During the meeting of the Federal Reserve today, there were no surprises. According to the Wall Street Journal, “The Fed took several actions at the meeting. First, it pulled back to $55 billion from $65 billion its monthly bond-buying program, which is aimed at holding down long-term interest rates in hopes of boosting spending, hiring and growth. It was the third reduction in the bond purchases since December”. Asset purchases, which have been reduced from $85 billion a month, are on pace to be finished this coming October. Tapering and the ending (in the growth of) asset purchases was already priced into the market before the Fed’s meeting. In short, tapering is old news. Although asset purchases will likely be done in October, it remains to be seen how the Fed unwinds its massive balance sheet.

The Fed made some (relatively) more exciting changes with respect to forward guidance. According to the Wall Street Journal, “The central bank also rewrote its guidance about the likely path of short-term interest rates, putting less weight on the unemployment rate as a signpost for when rate increases will start”. As the unemployment rate has decreased to 6.7%, the 6.5% threshold for unemployment has become a less significant data point for policy makers. Furthermore, limitations of the unemployment rate have made it less meaningful as an indication of conditions in the labor market. I have mentioned in previous blogs that changes in the unemployment rate were not accurately portraying underlying conditions in labor markets . For example, an increase in the labor-force participation rate pushed the unemployment rate up to 6.7% in the last employment report. Although an increase in the labor-force participation rate is perceived as good, an increase in the unemployment rate is seen as bad. According to the Wall Street Journal, “It said instead [of the 6.5% unemployment threshold] that the Fed would look at a broad range of economic indicators in deciding when to start raising short-term rates from near zero, where they have been since December 2008“. Therefore, I believe it was a good decision to ditch the unemployment threshold in favor of a larger set of economic indicators.

In addition, the Fed reconfirmed its forward guidance on interest rates. According to the Wall Street Journal, “The Fed took several steps to assure investors that interest rates won’t rise soon and that when rates do start rising the increases will be gradual and limited. For example, the Fed’s official policy statement included a new line noting that officials expect to keep rates lower than normal even after inflation and employment return to their longer-run trends“. Although this policy has been understood for some time, the Fed has finally decided to state this unambiguously. As the Fed continues to taper, most people assume that rate hikes will follow – the question is how soon they will follow. In addition to other factors, the inflation rate is going to be important in determining when interest rates will rise. If inflation remains below target, then rates will remain low long after the bond buying ends.

However, financial markets fell today – possibly due to what was said during the Fed’s meeting. According to the Wall Street Journal, “Even though the Fed’s official policy statement sought to give assurances of continued low rates far into the future and Ms. Yellen played down rate-increase expectations, stock prices fell and longer-term rates on Treasury bonds moved up”. Despite the lack of surprises, the Fed’s meeting managed to somehow cause worry among investors.

Apparently, the source of concern was regarding the perception of imminent rate hikes. According to the Wall Street Journal, “In a press conference after the meeting, Ms. Yellen suggested that interest-rate increases might come about six months after the bond-buying program ends – a conclusion that could come this fall”. Financial markets were not anticipating interest rates to increase in early 2015. After many years of aggressive expansionary monetary policy, the financial markets have become very sensitive to interest rate decisions.

Today’s Fed meeting essentially affirmed that interest rates will begin rising in 2015. Considering that asset purchases will likely end in October 2014, interest rate hikes in 2015 might seem sudden to financial markets. Regardless, I believe interest rates will begin rising in 2015 so financial markets might as well begin pricing that in. According to the Wall Street Journal, “Ten of 16 officials saw short-term rates rising to 1% or more by the end of 2015, with four of them right at 1%. Six officials saw rates below 1% by the end of 2015“. Although Ms. Yellen might have misspoke during the press conference, I think it is good that she was very clear about when interest rates will begin rising. Assuming there are no setbacks, I believe the economy is strengthening to the point where interest rates can begin to rise.

Fed fails to indicate what labor market signal will be

The Fed announced today that it will continue its tapering program, reducing purchases of long-term Treasury bonds from $35 billion per month to $20 billion per month, and cut back on its mortgage-backed securities purchases by $5 billion as well, to $25 billion. These results came as expected, with the $10 billion monthly decrease continuing each month. The bigger news was the Fed’s announcement on whether it will start to bring rates back up as the targeted 6.5% unemployment rate is due to be met in the upcoming weeks.

On Wednesday, the Wall Street Journal reported that “the Fed dropped the reference to the 6.5% jobless rate, which officials have come to see as too limited an indicator of the labor market’s health.” The proclamation of being “too limited an indicator” tells true, as unemployment rates have sunk in some part due to discouraged workers dropping out of the work force entirely after failing to find employment. However, the Fed offered little insight on what they believed better labor market indicators to be, or when they will determine that the economy has shown enough recovery. The stock market fell after the news, on the idea that rates may be rising sooner than previously expected.

The majority of Fed officials on Wednesday predicted that rates will begin to increase within the year, with 10 of 16 expecting increases to begin in 2015. The real news of the day was the ambiguity that the Fed left in its wake. Will a 6% unemployment rate be enough to spark a rate increase, or is the unemployment rate now discredited by the Fed as a worthy indicator? What should Americans expect moving forward, and when will the recession really end? According to Fed Chairwoman Janet Yellen, a multitude of factors will tell her when the time is right.

“Ms. Yellen said her dashboard for monitoring economic progress would include
the share of workers who have been unemployed for six months or more, the share
of adults who are holding or seeking jobs and the portion of workers who hold
part-time jobs but say they would rather have full-time occupations.” – WSJ

So while the news coming out of the meetings leaves more to be desired in terms of understanding the actual state of the economy and strength of the labor market, expectations can be made moving forward. All indicators show that the tapering process will continue as planned, $10 billion less bond purchases happening each month, and depressed rates while inflation sits below its targeted level. While the new measure for the state of the labor market certainly is more indicative of its actual all-around health, the Fed left much doubt for when it will finally be ready for a rate increase.

Possible Solution for Emerging Markets against Depreciation

Since the news of the FED’s tapering reached emerging markets (EM), EM currencies started to fell and eventually reached the lowest levels in 5 years. The downward movement was accelerated when the FED eventually started tapering its bond buying program raising long term interest rates in the U.S. The tapering by the FED had its worst effect on the EM as the investors pulled out their money from those countries and put somewhere less risky places, such as in the U.S.

Let’s discuss the effect of the tapering using International Finance graphs we saw today in the class. The result of the tapering would shift NCO curve for EM out as capital inflow to those decreases.

DepreciationThe outward shift of NCO will result in increase in the supply of the EM currencies given that EM central banks fix their interest rate. Thus increase in the supply of the EM currencies will depreciate the currencies. As we have discussed today on Brazilian CB’s possible move against the FED’s easier monetary policy, the EM central banks could increase their interest rates to bring back the depreciated currencies, which is the case we saw in countries such as Turkey, South Africa and Brazil throughout this course. However, as, again, in the case of overheated Brazilian economy through higher investment level, now we face the opposite situation when the FED’s tapering affect the EM and the EM responds back by raising the interest rates;  the EM central banks now face lower investment in their countries due to higher interest rates.

If the EM central banks let the currencies devalue, inflation could come in the EM. Even though Europe and other developed countries are facing the opposite problem deflation since the recession ended, the emerging markets and developing countries are relatively vulnerable to inflationary risk through their currency depreciation. Inflation is more likely to come to developing countries that import much of its consumption from outside.

Therefore, the central banks in the EM today face trade-off between decrease in investment and inflation.

The FED’s move toward gradual tapering is inevitable in next two years. The only question to the EM regarding the tapering and eventual short-term interest rate increase is how slowly or quickly the process will be unfolded. Considering possible time duration of the tapering, the EM countries should consider medium-run policy adjustments to the tapering.

MediumRunDeprecA possible way to respond to the FED’s tapering for the EM countries is to put capital outflow restrictions. If they can effectively put restriction on their NCO, the exchange rates for their currencies could bounce back as we see from the above graph. Moreover, by effectively limiting outflow of the capital out of a country, the emerging market country can have lower interest rate and, hence, higher level of investment in the medium-run.

The puzzle for the EM countries regarding capital outflow control is how effective this control will be to effectively decrease the net capital outflow. The recent paper by IMF researchers on “Effectiveness of Capital Outflow Restrictions” says that restrictions on capital outflow can decrease the net capital outflow if either the country has strong macroeconomic fundamentals and institutions, such as a central bank, or existing control over the capital outflow is already comprehensive. Then, according to the paper’s conclusion, If the EM countries believe they have economies where macro economics fundamentals hold and strong independent central banks, they could consider capital outflow control during the course of the FED’s tapering to avoid from large currency depreciation.

 

Which Emerging Markets were hit the hardest by FED tapering?

When Yellen said in February that the Fed would continue its tapering policy, emerging markets took a big hit.  Investors began to flee from the more risky emerging market economies back towards the US.  The flow of capital out of the emerging markets led to their currencies weakening and many central banks having to step in to stabilize currencies by raising interest rates.  Turkey, Brazil, South Africa were some of the countries that were hit hard by the capital flight.  The economic downturn that emerging markets saw is not something new.  Throughout history, tighter monetary policy usually leads to economic struggles in emerging markets.  The Asian, Latin American, Mexican crisis all were in response to the Fed rising interest rates.  When the US has lower interest rates, emerging markets can borrow more because of the lower cost to finance their debt.  Once US interest rates rise, or the Fed tightens monetary policy, it becomes more expensive for emerging markets to maintain their level of debt.  The lower US interest rates also forced investors to search for higher yields which also contributed to the movement of capital to emerging markets.  Two months later, the question becomes, which emerging markets were hurt the most by the Fed tapering.

A recent article by the Wall Street Journal analyzed the publishing of a recent paper by the National Bureau of Economic Research.  The paper found that it was the strong emerging market economies that were harmed the most by the Fed’s tapering announcement.  When I read this, at first I was surprised.  But as I thought about it more, it made more sense that stronger emerging markets would lose capital the most.  When investors were looking for higher yields, it would make sense that they would head to the economies with the next strongest fundamentals.  The NBER paper, written by Hutchinson, Binici and Aizenman, believes that emerging market economies with current account surpluses, high international reserves and low external debt were the ones that had the most flight of capital when the Fed announced tapering.  I believe that it was these strong fundamentals which were the reason why investors decided to send capital to the emerging markets.  The movement of capital to these emerging markets strengthened their currencies against the dollar and when the Fed announced tapering, it led to a large exchange rate depreciation.  I’m not surprised that the countries that attracted the most investment, because they was the next safest alternatives, lost capital the fastest.  The easier that capital flows, the more likely it will return to the safest option when that options yield increases.

(Revised) Malaysia Central Bank’s Decision

In ECON 411 –Monetary and Financial Theory class, we learned from Professor Kimball how effective negative real interest could be in order to stimulate the economy from the recession. By targeting long term inflation rate around 2 percent and setting nominal interest rate near zero, negative real interest rate can be achieved as shown by the Fisher Equation. US, Japan and many other countries used this monetary policy in order to stimulate the economy when financial crisis occurred in past years.

Wall Street Journal article (Rising Inflation in Malaysia Turns Up the Heat on Central Bank) points out Malaysia’s recent monetary policy and its outcome. Data which came out on Wednesday, February 19th showed that consumer price rose to 3.4% in January from a year earlier. Malaysia’s economy did grow at a strong rate past few years, and now Malaysia’s central bank is planning to raise the interest rate from 3.00% to 3.25 % as a measure of bringing the price level down. According to Wall Street Journal article (Malaysia’s Central Bank Stands Pat Again), Malaysia have been keeping its nominal interest rate at 3.00% for last three years. Due to its relative low interest rate compared to its inflation, Malaysia could achieve a fast economic growth, maintaining GDP growth rate of 4.7% in 2013 when many other countries suffered from the turmoil.

Malaysian government started to slow down its government spending, which could decrease domestic demand. Central bank’s decision of increasing interest rate could also reduce domestic demand, as people will save more money instead of spending it in domestic market due to higher interest rate. However, economists forecast that Malaysia can still achieve strong GDP growth of 5.0% to 5.5% this year, thanks to its strong export.

Malaysian central bank’s decision of increasing interest rate is a smart decision to hold inflation rate and curb dangers of overspending and control debt as well. When I read the articles and thought of Malaysia’s decision, I related this to US’s tapering of quantitative easing. US, although its unemployment rate is not meeting government’s goal fully, started to taper as US did achieve some economic recovery in recent years. “Tapering” is as important as “quantitative easing,” as economy could be over-stimulated and over-inflated and it could be very dangerous. Malaysia showed how effective “negative real interest rate” is, from its high GDP growth last year. If Malaysia can also show how they are able to control inflation and prevent “over-stimulating” the economy while keeping its economic growth strong just like economists have forecasted, it will be a good example of how negative real interest rate is a good, non-harmful stimulus for economic growth.

(Revised) Should the Fed be responsible for the sell-off in emerging markets?

Not surprisingly, the Fed decided to scale back its bond purchase program by $10 billion a month on last Wednesday, bringing the monthly total down to $65 billion. It is also worth mentioning that the decision was unanimous, which was the first time there has not been a dissent at a policy meeting since June 2011.

Again, the Fed emphasized that its exit strategy would be data-dependent – if there is strong evidence of improvements in the overall economy, mainly signaled by unemployment rate (below 6.5%) and inflation target (around 2%), it could continuously taper the bond purchase in “further measured steps at further meetings”, said the Fed chief Ben Bernanke.

Therefore, the $10 billion cut seems reasonable, given that the U.S. economic fundamental is improving and the Fed has become more optimistic about the nation’s future. Nevertheless, the decision could be somewhat controversial if the current situation of emerging markets is taken into consideration.

In the past few weeks, there has been a significant sell-off of emerging-market assets, partly due to the expectation of the Fed’s tapering. The reason behind is fairly simple – the U.S. economy is on the right track and the liquidity created by QE is decreasing, so investors tend to re-allocate their assets from those risky markets to the U.S. on its stronger risk-return payoff. As a result, the Fed statement surprised some people because of the complete ignorance of emerging markets.

From my perspective, the ignorance was grounded by two key reasons.

First, the turbulence in emerging markets was also caused by economic slowdown and uncertainties in developing nations. The Chinese manufacturing shown by its below-forecast PMI (Purchasing Manager’s Index) triggered pessimistic outlook on domestic consumption of the world’s second-largest economy and threatened the growth in other energy-dependent nations such as Brazil and Argentina. The weakening euro was hit by a return to record-low inflation in the euro zone and in particular, the Turkish lira was under attack due to political scandal and a wide trade deficit in that country.

Second, more importantly, although the Fed’s QE has a worldwide impact and even led to market distortion in some nations, the American central bank is only committed to assessing the health of the U.S. economy and taking actions accordingly. That is to say, the tapering decision should be based on the strength of economic recovery in the U.S. rather than in the rest of the world. Richard Fisher, President of the Federal Reserve Bank of Dallas claimed that the Fed should end its bond-buying stimulus effort as quickly as possible, and added in this time of unsettled global markets, the Fed has to pursue policies that benefit the American economy.

Therefore, the Fed is primarily responsible for the U.S. economy because of its role as the American central bank. Nevertheless, given the fact that it is the most influential central bank in the world and the QE has been injecting massive financial liquidity to many other countries, international cooperation on monetary policy is still something to expect.

Specifically, on one hand, the International Monetary Fund, an organization aimed at fostering global growth and economic stability, should further take advantage of its research and statistics to keep track of the economic health of its member countries and advise them, especially those developing nations, on economic management and capital flow control. On the other hand, the U.S. should take more responsibilities by making its tapering process more understandable and adjusting the pace in line with market expectations. As the Indian central bank governor Rajan said: “Industrial countries have to play a part in restoring that, and they cannot at this point wash their hands off and say we will do what we need to, and you do the adjustment you need to.”

Should the Fed be responsible for the sell-off in emerging markets?

Not surprisingly, the Fed decided to scale back its bond purchase program by $10 billion a month on this Wednesday, bringing the monthly total down to $65 billion. It is also worth mentioning that the decision was unanimous, which was the first time there has not been a dissent at a policy meeting since June 2011.

Again, the Fed emphasized that its exit strategy would be data-dependent – if there is strong evidence of improvements in the overall economy, mainly signaled by unemployment rate (below 6.5%) and inflation target (around 2%), it could continuously taper the bond purchase in “further measured steps at further meetings”, said the Fed chief Ben Bernanke.

Therefore, the $10 billion cut seems reasonable, given that the U.S. economic fundamental is improving and the Fed has become more optimistic about the nation’s future. Nevertheless, the decision could be somewhat controversial if the current situation of emerging markets is taken into consideration.

In the past few weeks, there has been a significant sell-off of emerging-market assets, partly due to the expectation of the Fed’s tapering. The reason behind is fairly simple – the U.S. economy is on the right track and the liquidity created by the QE is decreasing, so investors tend to re-allocate their assets from those risky markets to the U.S. on its stronger risk-return payoff. As a result, the Fed statement surprised some people because of the complete ignorance of emerging markets.

From my perspective, the ignorance was grounded by two key reasons.

First, the turbulence in emerging markets was also caused by economic slowdown and uncertainties in developing nations. The Chinese manufacturing shown by its below-forecast PMI (Purchasing Manager’s Index) triggered pessimistic expectation on domestic consumption of the world’s second-largest economy and threatened the growth in other energy-dependent nations such as Brazil and Argentina. The weakening euro was hit by a return to record-low inflation in the euro zone and in particular, the Turkish lira was under attack due to political scandal and a wide trade deficit in that country.

Second, more importantly, although the Fed’s quantitative easing has a worldwide impact and even led to market distortion in some nations, the American central bank is only committed to assessing the health of the U.S. economy and taking actions accordingly. That is to say, the tapering decision should be based on the strength of economic recovery in the U.S. rather than in the rest of the world. Richard Fisher, President of the Federal Reserve Bank of Dallas claimed that the Fed should end its bond-buying stimulus effort as quickly as possible, and added in this time of unsettled global markets, the Fed has to pursue policies that benefit the American economy.

In conclusion, the Fed is primarily responsible for the U.S. economy because of its role as the American central bank. Nevertheless, given the fact that it is the most influential central bank in the world and the QE has been injecting massive financial liquidity to many other countries, international cooperation on monetary policy is still something to expect.