Reduced US stimulus poses test to global economy
Print Edition
The world economy should finally overcome its hangover from the global financial crisis this year as growth picks up and house prices rise, but reduced US monetary stimulus will pose a challenge.
After months of angst, investors will see how the US Federal Reserve handles its decision to curtail its policy of easy money, starting from this month.
US jobs data on Friday will give markets a sense of the pace at which the Fed plans to pare back its bond-buying program, while minutes on Wednesday from its December 18 meeting will throw light on the central bank’s thinking.
“The United States will be the main focus given the Fed has finally started to taper its asset purchases,” said James Knightley, a senior economist at ING, referring to what economists call the “tapering” of US stimulus.
“Nonetheless, the Fed has made it clear that it will not be looking to run down the size of its balance sheet anytime soon, while rate hikes remain some way off,” he said in London.
The Fed’s stimulus revived the US economy after the biggest crisis since the Great Depression and the US economy is leading the global recovery. The United States could grow by up to 3 percent this year, helping the global economy to expand by almost 4 percent, according to the International Monetary Fund.
The delicate job of bringing the US$85 billion-a-month program gradually to an end will almost certainly fall to Janet Yellen, whose candidacy as the next Fed chair will be voted on by the US Senate today.
Yellen, who would become the first woman to chair the US central bank, would take the reins on February 1, the day after Ben Bernanke ends his two-term stint.
For emerging markets — major beneficiaries of cheap money unleashed by the Fed stimulus — a scaling back of the program will prompt investors to reduce their holdings of stocks and bonds. Short-term economic growth could suffer due to a failure to reform during the years of easy money.
Turkey is one country that relies on foreign capital to plug holes in its balance of payments and the country will be in focus again in the week ahead, not least because Ankara faces its greatest period of political instability in a decade.
Markets have calmed since the last week of 2013, when Prime Minister Tayyip Erdogan dismissed police officers involved in a corruption investigation that has dragged in relatives of ministers and others with close links to the government.
But a falling lira is saddling companies with higher payments on foreign loans and pushing up inflation.
Indonesia, also vulnerable in the face of reduced US stimulus due to its sizeable current account deficit, has been at the center of the sell-off in emerging currencies and will hold a central bank policy meeting with the Fed firmly in mind.
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