- Emerging market woes continue as three central banks pull out the stops
- The Bernanke era comes to an end, but the Bernanke paradigm is here to stay
The drama in the beleaguered emerging markets continued this week, with
markets still intently focused on the yawning external deficits and
increased financing vulnerabilities in these countries. In fact,
anything with an "emerging markets" tag on it (with the exception of the
officially managed Chinese yuan) wilted before the relative safety of
the USD and US Treasuries. The Fed's decision to taper a further $10bn
from its QE program on Wednesday
certainly didn't help, plus data showing yet another strong quarter for
US growth (again driven by inventory and exports), certainly didn't
help. The situation was such that three EM central banks - those of India, Turkey, and South Africa - decided take matters in their own hands, raising interest rates in an attempt to spare their currencies from further carnage. In the case of Turkey, the rate hike was a whopping 5 percentage points! The
worst part though, was that for all the drama that accompanied the
announcements, they actually didn't do much. In fact, the currencies of
all 3 countries, and those of many others (including Argentina, the
theme of last week's post) are in no better shape than the same time
last week. The moral of the story is: tampering with interest rates is a
Band-Aid solution, and nothing more. Until the emerging economies
tackle their structural problems head on (overvalued currencies,
rigid/uncompetitive labor markets, distortionary price controls, runaway
public spending etc. etc.), they will never be fully immune from
speculative attacks. You never know when the next George Soros will come
swooping in ...
The Bernanke era comes to an end: The
mayhem in the emerging world almost overshadowed the leadership change
in the world's most powerful central bank. After eight years, Ben
Bernanke's tenure as Fed chairman formally came to an end on Friday.
For better or for worse, the Bernanke era has truly transformed central
banking's place in economic policymaking. Whereas central banking used
to be a simple exercise in hiking short-term interest rates when
inflation pressures ticked up (or vice versa), it's now much more than
that: bond and mortgage purchases, emergency loans to banks, collateral
swaps, banking supervision, forward guidance etc. etc. One needs to look
no further than the quintupling of the Fed's balance sheet to $4
trillion (and the hundreds of billions more in euros, yen, and pounds
that have been pumped into the markets) to recognize the scale of the
paradigm shift. And with that, be under no illusions: the Bernanke paradigm is here to stay.
Though the new FOMC chair is named Yellen, this will remain very much a
Bernanke-esque Fed. We've mentioned this several times and we
won't belabor it too much further, but as a reminder: the low rates and
activist central banking won't go away anytime soon.
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