The end of easy money?


Last May America’s central bank, the Federal Reserve, indicated it would begin to wind down its money printing operations – by reducing its purchases of government bonds – which amount to $85 billion (€63billion) each month. The announcement created some uncertainty in the US, but caused no investor panic. The stock and bond market adjusted relatively calmly to the likely withdrawal of what has been a massive stimulus by the central bank. Financial markets in the US and elsewhere reacted by pushing up bond yields and interest rates. However, one unintended and unanticipated consequence of tighter US monetary policy has been a rapidly developing currency crisis in some Asian and Latin American economies – most notably in India.

The Fed’s move signalled the end of cheap money and of historic low interest rates, and a return to dearer money and higher rates. Emerging market economies have been major beneficiaries of these low rates. They have attracted large inflows of mobile foreign capital seeking a higher investment return there, than was available in the US or other developed economies. But with the American economy’s return to stronger growth and the Fed planning to reduce its bond buying in response, money has moved out of Asia and emerging markets rapidly, and returned to the lower risk developed economies.

This capital flight has resulted in a sharp fall in the currencies of emerging market economies, such as the Indian rupee. Governments and central banks in many of these countries, including India, Brazil, Turkey, and Indonesia, have introduced a wide range of measures to boost their currencies and to restore investor confidence, but without much sign of success so far. Wisely, in the light of these developments, IMF managing director Christine Lagarde has said the IMF and governments should now be thinking clearly of all of the many ramifications of the ending of easy money programmes.