5 Feb 2014
Flash: QE 'trap' responsible for emerging market turmoil - Nomura
FXStreet (Bali) - As Richard Koo, chief economist at Nomura Research Institute, notes, the Fed is in the process of mopping up the huge amounts of liquidity provided during the post financial crisis era, which as a result, has caused nervousness in EMs.
Key Quotes
"If the Fed had not undertaken QE, there would be no reason for anyone to be nervous at this point in the recovery cycle. All they would have to do in that case is sit back and welcome the recovery as it unfolds."
"But once the central bank turns to QE, the authorities must mop up the massive amounts of liquidity released onto the market as soon as the economy starts to recover."
"The need for quick action leaves both the authorities and the markets very nervous at times like this. That nervousness, in turn, could push long-term interest rates higher than warranted by actual economic conditions."
This, in a word, is the quantitative easing “trap” that surfaced in the latter half of 2013. The recent turmoil in emerging markets is also part of the trap resulting from that nervousness."
Key Quotes
"If the Fed had not undertaken QE, there would be no reason for anyone to be nervous at this point in the recovery cycle. All they would have to do in that case is sit back and welcome the recovery as it unfolds."
"But once the central bank turns to QE, the authorities must mop up the massive amounts of liquidity released onto the market as soon as the economy starts to recover."
"The need for quick action leaves both the authorities and the markets very nervous at times like this. That nervousness, in turn, could push long-term interest rates higher than warranted by actual economic conditions."
This, in a word, is the quantitative easing “trap” that surfaced in the latter half of 2013. The recent turmoil in emerging markets is also part of the trap resulting from that nervousness."