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As the most powerful central banker in the world, he was key to the architecture of QE in its implementation and the beginning of the exit late last year. One of the reasons stemmed from the emerging market instability was the realisation that the Fed is not likely to backtrack from their process of exiting their asset purchase program from the markets.
There are many issues raised from QE and the predominant debate is the State of the Union address from President Obama tonight on income inequality and raising minimum wages. Other proposals would include the Keystone pipeline, TPP and tax policy.
The speech from President Obama tonight will reveal whether he has a plan to expand the economy and how he would address the labour market. Countries involved in the TPP deal will be keen to find out on the progress of these talks where the US and other leaders have pledged to the elimination of tariffs. This pact has been estimated to make up 40% of global economy.
In tomorrow’s FOMC meeting, the question on whether the Fed will continue to reduce stimulus by $10 billion is mostly priced in. It is accepted by the markets that the Fed will not want any more shocks in the market, thus the plan is to slowly take their foot off the pedal. The statement of where they see the US economy, and any mention of the recent emerging markets vulnerability, will be what investors look out for. After a surge of strong US data, the recent reports such as durable goods, new home sales and Richmond Fed manufacturing index have been below estimates.
The after effect of the emerging market selloff has been concluded that it was the Fed pushing these countries off the risk curve and the consequences are less clear. There are rate hikes in India followed by Turkey, and the currency risks remain in Argentina.
While developed nations and North Asia have weathered the sell-off with less impact, there will be an effect if there are major downturns in emerging economies. For now, emerging Asian economies are likely to struggle this year due to structural, and in certain cases, political issues – like Thailand. The growth and recovery from developed countries could buoy certain countries such as Indonesia on capital flows.