US Federal Reserve chairman, Ben Bernanke, is working hard to keep markets calm, while easing off the monetary support he has been using to keep the US economy on track.
As the economy shows signs of improving, the Federal Reserve wants to start reducing the amount of money it is pumping into the US — and global — markets. The slow but steady improvement in US unemployment figures is the best sign that the recovery is becoming increasingly sustainable.
However, world markets have become used to cheap money — a lot of which has gone into emerging markets as investors seek better returns. A recovery in the US economy will attract a lot of money back to what is perceived as a safe investment destination, reducing the funds available for other markets, particularly those in emerging countries. As seen when Bernanke first raised the idea of reducing economic stimulus, this can result in dangerous volatility in global markets.
Bernanke has been assuring investors that at the first sign of weakness in the US economy, he will continue with his easy monetary policy. But that is of little consolation to emerging markets, which face asset bubbles as long as the Federal Reserve’s easy monetary policy continues, but an outflow of funds if it stops. Bernanke must keep in mind that he has a responsibility to the global economy and manage the return to normal monetary policy cautiously.
But, perhaps it is better for emerging markets to take some pain now, rather than face the catastrophic risk of asset bubbles bursting again.