The Fed and Emerging Markets: Another Crash?

Takeaways from the Harvard Kennedy School IDEASpHERE panel “The Fed and Emerging Markets: Another Crash?,” with Jeffrey Frankel, Carmen Reinhart, and Robert Zoellick

Sampling of Notable Thoughts

“Let me tell you the number one priority in China. It’s the preservation of the Communist Party. And economic reform is a means to that end. All the cadres have been instructed to go watch a documentary of the end of the Soviet Union. Gorbachev is not the star of this story.” — Robert Zoellick

"We’ve had, like in most episodes, massive overshooting of what’s happened in Europe in terms of six years of contracting. Six years is rare....Contractions seldom last that long, even in the worst crisis. So during that period, capital just evaporated.” — Carmen Reinhart

Summary

After years of extraordinary measures by the Federal Reserve in the aftermath of the Great Recession, emerging markets appear to have weathered the disruption fairly well but are facing new headwinds as economic growth falls short of expectations. That was the sobering assessment of three experts on the global economy at a panel titled “The Fed and Emerging Markets: Another Crash?” held at Harvard Kennedy School’s “IDEASpHERE” on May 15, 2014.

Harvard Kennedy School Professor Jeffrey Frankel began the session with a brief history of capital flows to emerging markets. He discussed the role of U.S. monetary policy in these flows and suggested three early-warning indicators: 1) foreign exchange reserves; 2) currency overvaluation; and 3) current-account deficits.

Carmen Reinhart, a Harvard Kennedy School professor and co-author of “This Time is Different: Eight Centuries of Financial Folly,” pointed out that emerging markets weathered the global financial crisis reasonably well because past crises have made them “lean and mean.” The biggest risk to emerging markets, she said, is economic slowdown, particularly with China.

Former World Bank president Robert Zoellick agreed that there are signs of a downdraft for emerging markets. He said that earnings will have the last word, and that the sooner the US economy grows, the better off the world will be.