New York Federal Reserve Building. Photo: Reuters/Keith Bedford
New York Federal Reserve Building. Photo: Reuters/Keith Bedford

Daniel Moss writes in an editorial for Bloomberg this week that the Federal Reserve’s increased transparency is to credit for newfound independence of emerging market policy makers:

When the Fed is predictable, everyone else can be much less reactive. By reducing financial-market volatility, the Fed has made it easier for the other central banks to plan ahead.

Indeed, as Moss writes, “[…] three of the biggest emerging markets have cut rates as the U.S. has gradually raised them. Borrowing costs have come down in Brazil, Indonesia and India, reflecting the need to give local economies a boost and, for the most part, relatively contained inflation. All the more striking is they have done so without en-masse capital flight. All three currencies are up against the dollar this year.”

But as David Goldman wrote last June in Asia Unhedged, the decline of the United States as the center of the world’s economy cannot be ignored as an important factor in this greater degree of independence:

Financial markets this week revealed an historic shift away from an America-centered world economy. What is supposed to happen when central banks tighten – what used to happen – is that commodity prices drop along with emerging markets stock and equities. The Federal Reserve is supposed to – or used to – set the pace for global monetary policy.

Something different happened—in fact, something we haven’t seen before.  As bond yields spiked in the industrial world, led by Frankfurt rather than Washington, commodity prices rose. That’s because world demand at the margin no longer depends on the United States. World trade growth is weak in the industrial world and robust in emerging Asia. China is the marginal buyer of oil and industrial metals. China was supposed to be the source of risk in the world economy. Instead, it is an anchor of strength.

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