Wednesday, January 29, 2014

Fed’s Benign Neglect of Emerging Economies
The message to emerging economies in today’s FOMC statement was: “Vaya con Dios.” Of course, that phrase did not appear in the statement. Rather, it was implied when the recent crisis among several emerging economies wasn’t mentioned at all. In other words: “We wish you well, but your problems aren’t our problem. So there’s no reason to suggest that your crisis is having any impact on US monetary policy.”

Indeed, Fed officials seem quite sanguine that the crisis among some of the emerging economies won’t have any significant impact on the US economy. On the contrary, the FOMC statement noted: “The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced.” The exact same comments appeared in the previous statement following the 12/18 meeting of the FOMC. I agree with the Fed's assessment.

As was widely expected, the FOMC voted to taper QE by another $10 billion to $65 billion per month. There were no dissenters. So the committee unanimously voted to reject the recent advice of IMF officials and economists to temper their tapering for the sake of the emerging economies.

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