It was 20 years ago this week that then-Federal Reserve Chairman Alan Greenspan questioned whether the U.S. could remain an oasis of prosperity in an increasingly fraught world economy. Now Jerome Powell is getting his first crack at that puzzle as emerging markets crumble.
The rout in both the stocks and currencies of emerging nations has prompted strategists from JPMorgan Chase & Co. and BlackRock Inc. to warn of contagion sweeping through the markets. It’s also begun to raise questions about the durability of a global economic upswing that just a year ago was being trumpeted as the most synchronous in decades.
The challenge is Powell and his colleagues confront a policy paradox. The stronger the U.S. economy looks, the more compelling the case for higher interest rates. But a heightened prospect of dearer credit risks ratcheting up pressure on emerging markets, especially those heavily dependent on foreign finance.
“Jay has a complicated landscape to navigate,” said Institute of International Finance chief economist Robin Brooks, referring to the current Fed chairman by his nickname. “The U.S. economy is strong but stresses are building in emerging markets.”
Investors are betting that the Federal Open Market Committee will persevere with its third rate hike this year when it meets this month. They’re less certain of what comes afterward, even though policy makers themselves have provisionally penciled in gradual rate increases through next year and into 2020.
“There are countries like Turkey and others having political challenges, economic challenges,” Minneapolis Fed President Neel Kashkari said Wednesday in an event at Montana State University. “Those could lead to some type of contagion around the world potentially. And then maybe if we have companies exporting to emerging markets, they could be directly affected by that.”
The contradictory forces facing the Fed came to the fore on Tuesday, when stronger-than-forecast U.S. manufacturing data boosted expectations of further rate rises, feeding risk-off sentiment in emerging markets.
More turbulence could be in store if Friday’s release of the monthly U.S. jobs numbers paints a similarly robust picture of the economy. That might particularly be the case if wage growth finally shows signs of accelerating.
Payrolls are projected to have risen 198,000 last month, after increasing 157,000 in July, according to the median prediction of economists surveyed by Bloomberg. Unemployment is forecast to have ticked down to 3.8 percent from 3.9 percent, while annual earnings growth is seen as holding steady at 2.7 percent.
Tariff Risks
It’s not only the Fed’s slow withdrawal of stimulus from the world economy that emerging markets are having to deal with. They’re being buffeted by other shocks as well, including President Donald Trump’s tariff increases on selected U.S. imports and his sanctions on Russia. And domestic drivers -- such as political uncertainty in Brazil -- are also at work.