WASHINGTON – As the Federal Reserve weighs an imminent cut in its extraordinary economic stimulus, many outside the United States are pleading with the Fed, “Would you consider the impact on us too?”
That essentially was the message Friday from the head of the International Monetary Fund, Christine Lagarde. Speaking at an opening luncheon of the Fed’s summer conference in Jackson Hole, Wyo., Lagarde turned the spotlight on what has emerged as the main global economic issue of the day: the bold actions of central banks and, as she put it, how these policies “in one corner of the world can reach all corners.”
While the IMF’s managing director spoke generally about central banks, it was clear that she was focused on the Fed and the widespread expectation that next month it will start scaling back a massive bond-buying program that has helped hold down long-term interest rates and, until recently, kept emerging markets flush with cheap money.
In recent weeks, as interest rates in the U.S. have jumped in anticipation of the Fed’s tapering of stimulus in September, investors have pulled cash from India, Brazil, Indonesia and some other developing economies. That has resulted in steep declines in their currencies.
The rise in interest rates and the flow of capital back to the U.S. and other developed nations aren’t just related to the Fed. They reflect the somewhat brighter growth prospects in developed economies, Europe and Japan included, while the rapid declines in emerging-market currencies point to some long-standing structural and financial challenges in those countries.
“No country is an island,” Lagarde said. “Looking at the wider effect is in your self-interest. It is in all of our interests.”