The U.S. Federal Reserve is expected to begin raising policy interest rates in the near term, and thus commence a tightening cycle for the first time since the financial crisis. While a disorderly reaction from markets is not expected, some lessons can be drawn from the taper tantrum episode regarding sources of vulnerabilities and policy responses.
A liftoff in U.S. policy interest rates has been delayed amid global uncertainties, but is still expected in coming months. A largely anticipated tightening cycle in a context of a recovering U.S. economy should have benign implications for emerging and frontier markets but significant risks persist.
Quantitative easing by the European Central Bank has helped maintain low global borrowing costs, while contributing to a depreciation of the euro and broad-based appreciation of the U.S. dollar. Low interest rates in the Euro Area could provide ongoing support to capital flows to developing countries and help reduce pressures from a gradual normalization of U.S. monetary policy.
U.S. consumer confidence drops sharply in September
Oil prices extended their weekly decline on Friday after Wall Street’s most influential voice in oil trading, Goldman Sachs Group Inc., cut its price forecasts, citing a global supply glut and concerns about China’s economy. Brent, the global benchmark, fell 2.6 percent (or $1.27) to $47.62 a barrel, extending its weekly decline to 3.9 percent, while West Texas Intermediate (WTI), the U.S. benchmark, lost 3.2 percent (or $1.48) to $44.44 a barrel, down 3.4 percent this week.
China’s foreign exchange reserves plunged by $93.9 billion in August, the biggest monthly drop on record, to $3.557 trillion, underlining the pressure endured by the country’s central bank as it tried to prop up the yuan and stabilize financial markets. The decline in China’s reserves has accelerated recently as capital outflows have risen due to fears of an economic slowdown and prospects of rising U.S. borrowing costs.
The European Central Bank (ECB) signaled readiness to provide more monetary stimulus to counter downside risks to growth and inflation. Mario Draghi, the ECB president, said policy makers adjusted the parameters of their bond-buying program to allow for more purchases and lowered economic forecasts. The ECB also left interest rate unchanged at record lows.