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Round Up – US Fed, UK Growth, Emerging Markets

James Boston
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The US Federal Reserve ignored emerging market volatility and pressed ahead with announcing a further $10bn cut to the monthly bond purchase program. Although this move was well anticipated it did little to appease the uncertainty being experienced by the more vulnerable economies around the globe. The Turkish Lira gave up almost all of its gains overnight despite a surprise 425bp interest rate hike on Wednesday. The South African Rand also came under pressure, falling almost 2%, in defiance of the unexpected move by the Reserve Bank to lift interest rates from 5% to 5.5%.

Could the US Federal Reserve have called this one wrong? It appears on the surface that the US Fed has signaled an intention to focus only on the domestic economy. It is however difficult to believe that this approach is viable in the long term, particularly given the significant influence of emerging economies on global fortunes and therefore ultimately on the US recovery. Perhaps the Fed overestimated the impact of the concerted efforts by the emerging economies to control capital outflows and protect their currencies. Either way, emerging market volatility is set to continue in the near term as investors are struggling to find reasons to commit their capital to high risk economies, despite the increasing returns being offered by raising interest rates.

The UK is struggling with a problem of a different nature, controlling the pace of the recovering economy. UK home loans figures published yesterday showed a return to levels not seen since before the crash, in fact these numbers reflect the highest level since December 2007. Credit for the boom in house sales is being attributed to a combination of low interest rates and specific government measures to encourage home ownership. Although an asset bubble is not a near term prospect, either the government or the Bank of England will be required to take measures to temper this pace of growth, the problem being that neither player is prepared to do so in the near term.

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