IMF: Growing Economies Should Prepare for Fed Policy Tightening & Rate Hikes

In a blog published Monday, the International Monetary Fund said, growing economies should prepare for U.S. interest rate hikes, warning that faster than expected Federal Reserve moves could rattle financial markets and trigger capital outflows and currency depreciation abroad.

It said a gradual, well-telegraphed tightening of U.S. monetary policy would likely have little impact on emerging markets, with foreign demand offsetting the impact of rising financing costs.

The IMF said, citing the risks posed by faster-than-expected Fed rate hikes and the resurgent pandemic, "Emerging economies should prepare for potential bouts of economic turbulence."

St. Louis Fed President James Bullard this week said the Fed could raise interest rates as soon as March, months earlier than previously expected, and is now in a "good position" to take even more aggressive steps against inflation, as needed.

"Faster Fed rate increases could rattle financial markets and tighten financial conditions globally. These developments could come with a slowing of U.S. demand and trade and may lead to capital outflows and currency depreciation in emerging markets," senior IMF officials wrote in the blog.

It said emerging markets with high public and private debt, foreign exchange exposures, and lower current-account balances had already seen larger movements of their currencies relative to the U.S. dollar.

Governments could also announce plans to boost fiscal resources by gradually increasing tax revenues, implementing pension and subsidy overhauls, or other measures, it added.

©Photo: REUTERS/Johannes P. Christo