Vishnu Varathan of Mizuho Bank states that
“emerging markets in Asia are gauging whether there will be any unwanted, unwelcomed macro stability risks from the Fed doing more than what markets are betting on and markets are betting on far less.”
The Fed is advising against doing more as they may decide to maintain it there for longer. These are the kinds of risks that EM Asia will have to manage. Because likely,
“inflation has likely peaked, and the question is how quickly it recedes.”
Even if the markets are correct about the outcome, US interest rates are extremely high when compared to what we have seen in the past for more than a decade. High US interest rates will limit capital inflows into Asia and may even make outflows more likely. It increases the dangers of twin deficit threats and then further destabilizes the currencies of EM Asia.
Beginning in the new year, EM Asia will have to deal with two different types of emerging risks. Higher flat rates first hurt EM Asia, the stability of the asset market, and overall stability.
“As the session risks become clearer, you could see another risk of capital flight at least in the initial phase of it.”
The risks do not necessarily end with the fed, though. The risk we face then is simply different.
Information from CNBC