Fed pause could reignite ‘wall of money’ for emerging markets, trade group says
- Pickup in emerging markets inflows has broadened beyond China recently, according to Institute of International Finance
- Federal Reserve likely to hold off rate hikes until second half
A pause in tightening by the US Federal Reserve could be a boost to emerging markets as investors look beyond China-related securities for growth, according to the Institute of International Finance.
In a new research report, Robin Brooks, the trade group’s chief economist, and associate economist Jonathan Fortun said that much of the pickup into emerging markets stocks and bonds this year has been driven by China, but that has broadened in recent weeks, particularly in equities.
The Fed’s recently changed stance on further rate hikes could “reignite a wall of money” into emerging markets, according to the report.
“What made last week’s [January 29 to 30 Federal Reserve] meeting so notable was how much of the Fed’s long-standing narrative was dropped, including the tightening bias, the [quantitative tightening] path and risk assessment,” Brooks and Fortun said. “Perhaps the most important change was the addition of ‘patient’ to the statement, a loaded term in Fed parlance.”
“The last time ‘patient’ made an appearance was in December 2014, when
it replaced ‘considerable time’ and signalled a shift to cautious tightening,” they said. “‘Patient’ stuck around for the January 2015 meeting, was dropped in March, and the Fed eventually hiked for the first time in December 2015. ‘Patient’ in other words signals a prolonged pause.”
The IIF economists said they expect the Fed to hold off on any additional rate hikes until the second half of the year, when they expect two.
