Emerging economies are facing significant uncertainty and serious downside risks. One major source of instability is the looming reversal of the U.S. Federal Reserve's expansionary monetary policy — the prospect of which is generating volatility in global financial markets and threatening to disrupt emerging-economy growth.
The Fed has signaled that its federal funds rate will remain near zero percent, at least as long as unemployment exceeds 6.5 percent and inflation expectations remain well anchored. But when and how the Fed will begin tightening monetary policy remains unclear.
What is certain is that, in making its decision, the Fed will not consider its policy's spillover effects on the rest of the world, leaving affected countries' policymakers and central bankers to deal with the fallout.