A return cycle of capital from emerging markets is on the card as the US Fed has raised its policy rate for the second time after the reversal of monetary stimulus. More than that, the US central bank has indicated more rate cuts in the coming year, than it previously indicated.
The Fed raised its policy rate called the Fed rate to between 0.5% to 0.75% on Wednesday.
The central bank was expected to raise the rate as US inflation rate and employment rate went on to the expected figure. Inflation has got momentum over the last two months and the Fed was informing the market about the rate hike consistently.
Markets and currencies have already accommodated the rate hike though the decision is expected to make some impacts especially in the emerging markets.
But the curious question is about the future policy indication. Fed’s revelation that interest rate hike will continue in the coming quarters may bring pressure on the emerging markets. Such a prolonged tight monetary policy is expected to reverse capital flows from the emerging markets back to the US.
Previously, Fed’s stand was that it may increase the rate for two quarters in 2017, but in the renewed document on yesterday, it indicated a three-quarter upward action.