Bernanke readies for tapering plan; Emerging Markets are in agony

Emerging markets should tighten their seat belts once more –the US Fed Reserve Chairman Ben Bernanke is going to take a firm decision on ending the monetary stimulus programme.  It is expected that this time, Bernanke will announce a monthly reduction targets for the bond purchase.

A major condition for the withdrawal of the Quantitative Easing was the recovery of US job market. So far, the US economic recovery is quite mixed. Unemployment continues at marginally above seven percent compared to Bernanke’s comfort zone of 6.5 per cent.

On the other hand, the four year long QE programme has injected liquidity worth nearly 2.7 tn into the financial system and the central bank’s balance sheet has bulged extraordinarily. A natural return is necessary whatever happens to US economic recovery.

 On the return side, the QE programme has crossed the inflexion point and even if it is continued, it may bring some more positives; but at the possibility of growing risks like inflation and financial system stress.  

The US economy is perhaps half ready to accept Bernanke’s tapering. Hence, he may go for a mild launch of the tapering. A reduction in bond purchase by $ 10-15 billion is a mild one and financial markets may not oscillate much to such a muted launch. On the other hand, anything above $20 billion will be a bigger one and the financial markets across the world may be shocked and may come under panic.

Impacts on EMEs

The financial markets and currencies of emerging markets have reacted vigorously to the withdrawal news of the tapering a couple of weeks ago. But during the last week, the stocks returned and currencies recovered. All across the emerging world, markets were in uneasy calmness.

The BRICS has suggested an orderly exit from the monetary stimulus programme to minimize the impacts of the tapering on the emerging market economies. Current account deficit countries are worried at the currency crisis risks of large scale launch of the tapering. In India and Brazil, central banks should make extra precautions to cover their currencies in the case of a hard launch of the tapering by Bernanke.

The emerging markets hence can expect a panic time in the coming days. All depends on the extent of tapering by the Fed Chairman. 

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