The U.S. Federal Reserve has brought both good and bad news by deciding to delay scaling back its massive bond-purchasing program.
The Fed has been printing money to inject liquidity into the financial system and thereby stimulate the U.S. economy. Each month, it has purchased $85 billion worth of Treasury and mortgage bonds to encourage people to borrow, spend and invest.
Until early last week, the Fed was widely expected to take its first step toward rolling back the extraordinary stimulus measures this month. A majority of Wall Street analysts predicted that it would announce a reduction of $10 billion-$15 billion in its bond purchases at its Sept. 18 meeting.
But it decided to keep the current quantitative easing measures intact, citing the weak hiring and economic growth figures.
The Fed’s unexpected move is good news for a group of emerging countries whose currencies have plummeted in value since May when Fed Chairman Ben Bernanke first suggested a possible pullback of the stimulus program within this year.
These countries, including Indonesia, India, Thailand and Turkey, suffered an outflow of foreign capital as the prospect of higher U.S. interest rates caused the flows of money to reverse.
The Fed’s decision is welcome as it will give some relief to these vulnerable economies. It also gives them more time to prepare for Washington’s eventual tapering of the monetary stimulus. The Korean government also welcomed the decision, although it experienced an inflow, rather than an outflow, of foreign capital in recent months.
Korea is no longer a crisis-prone country. Rather, its strong fundamentals have earned it safe haven status. Yet the country is not entirely immune to global financial storms, as its economy is wide open and relies heavily on exports for growth. If a shock in global financial markets throws the financial systems of emerging countries out of whack, Korea cannot avoid the fallout.
It is in this regard that Korea welcomes the Fed’s move. It is expected to cushion the impact on global markets when the Fed embarks on a pullback process. This will benefit Korea and the rest of the world.
Now the bad news: The Fed’s surprise decision was prompted by the softer-than-expected recovery of the U.S. economy, which is the locomotive of the global economy.
For Korea, the U.S. represents the second-largest single export market. A slow recovery of the U.S. market would hamper growth of Korea’s exports.
Yet it seems to be only a matter of time before the Fed starts winding down the stimulus program. It is expected to take its first step within this year. Policymakers need to keep their guard up.