Rising inflation means Fed unlikely to abandon plans

With inflation trending higher and economic growth receiving a boost from this year’s fiscal stimulus, it is unlikely that the destabilising declines in a few emerging market currencies will force the Fed to abandon its plans to raise interest rates once a quarter. When a slowdown in China’s economy in 2015 prompted the Fed to reconsider planned rate hikes, there was still more slack in the labour market and headline inflation was unusually low, mainly because of the sharp falls in global commodity prices. The Fed also cut interest rates in the wake of the sharp falls in Asian currencies in 1997. The difference in domestic conditions means that the Fed doesn’t have the luxury of being able to wait as it did in 2015, however. At the same time, we expect the fallout in emerging markets to be much more limited this time around.