Developing countries are the most vulnerable to the US Federal Reserve System monetary policy changes

At the last meeting of the outgoing year, held on 13–14 December, the US Federal Reserve System decided to raise the federal funds rate by 0.25 p.p., to 0.5–0.75% per annum. In addition, the Federal Reserve System announced the possibility of further rate tripling in 2017, which was a surprise to many economic agents.

Let us remember that the US Federal Reserve System raised the federal funds rate in December 2015 for the first time in 9.5 years, and its head, Janet Yellen, said the monetary policy would be further tightened during 2016. Moreover, in end of May, Yellen outlined specific time frame for changing monetary policy, saying the interest rate will be raised twice during the year, including at one of the next meetings.

However, the implementation of the regulator’s plans was hindered by weak macroeconomic data for the I half of the year, including slowing growth rate of consumer prices, as well as by the increased turbulence in global financial markets, provoked by the results of the referendum on the United Kingdom’s withdrawal from the EU and the subsequent easing of monetary policy by the central banks of England, the euro zone, and Japan. As evidenced by the minutes of the July meeting of the US Federal Reserve Service Monetary Policy Committee, the referendum results formed heightened uncertainty about the development of the world economy in the medium and long terms, creating additional risks for the US economy.

At the same time, current economic data confirms the formation of stable positive trends in the II half of 2016 already. Since August, the rise in prices on the US consumer market has been accelerating, and in October, it reached 1.6% compared to the same period of the previous year, which is two times higher than the minimum of July (0.8% in comparable terms). The unemployment rate in November fell to the level of August 2007 and amounted to 4.6% (4.9% in the previous month).

In our opinion, the countries most vulnerable to changes in the US Federal Reserve System monetary policy are developing countries that could be affected by large-scale capital outflow. Exchange rates of national currencies of Brazil, South Africa, Indonesia may be subject to significant correction, as speculative demand for them in anticipation of changes in the Federal Reserve System’s policy provoked their rapid strengthening.

However, in our opinion, most of the risks associated with an increase in the federal funds rate by the US Federal Reserve System are already taken into account by economic agents, including in financial asset price changes. According to CME Group data, for more than 92% of the respondents, the tightening of monetary policy was not a surprise, which proves the effectiveness of the forward guidance policy implemented by the US Federal Reserve System, i.e. the policy of informing agents about the possible course of monetary policy in advance.

Anna Kiyutsevskaya – researcher of Monetary policy Department