Why Fed officials' suggestions that a third round of stimulus is possible may have sent emerging market central bankers into a cold sweat.Like Pavlov's dog, which would salivate at the sound of a bell, U.S. stock market investors will these days launch into a buying frenzy at the faintest hint of more monetary stimulus.
But if Federal Reserve officials' assurances of continued support for the U.S. recovery have released feel-good endorphins among wishful thinkers on Wall Street, their subtle admissions that a third round of "quantitative easing," or QE3, isn't off the table may equally have sent emerging market central bankers into a cold sweat.
Financial authorities in developing countries fear their economies will be in the line of fire if U.S. economic conditions deteriorate so much that the Fed again starts buying bonds to anchor U.S. interest rates. They know from experience that many of the dollars the Fed injects into the financial system would flow offshore and into their currencies, whose higher yields are more attractive to investors. This "hot money" would push up their exchange rates to the detriment of their exporters and leave their capital markets vulnerable to volatile turns in sentiment. Read More
