IMF Warns Emerging Economies to Prepare for Fed’s Policy Tightening

The International Monetary Fund (IMF) warned on Monday that emerging economies should prepare for sudden policy moves from the Federal Reserve which could rattle financial markets and trigger currency depreciation abroad.

In a new blogpost, the IMF said that it expects strong U.S. growth to continue and that a gradual, well-telegraphed tightening of U.S. monetary policy is likely to have minimal effects on emerging economies.

However, since “broad-based U.S. wage inflation or sustained supply bottlenecks could boost prices more than anticipated and fuel expectations for more rapid inflation,” the Fed is likely to tighten monetary policy faster than the ideal pace.

“Faster Fed rate increases in response could rattle financial markets and tighten financial conditions globally,” the IMF wrote.

The international lender added that an anticipated slowdown in U.S. demand and trade could lead to capital outflows and currency depreciation abroad, making the impact of a sudden Fed increase more severe for vulnerable countries.

The Fed is set to end its asset-purchase program in March and expects to raise interest rates three times this year. The minutes of its December meeting also hinted that it could begin slowing down its bond reinvestments, known as quantitative tightening (QT).

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