U.S. Central Bank's (Fed) decision concerns very closely the emerging countries. The saving rates of these countries are very low; they need to borrow from abroad in order to reach the investment/GDP ratio to an international level which is currently mediocre. Each step towards the tightening and then the reducing by the Fed of the quantitative easing monetary cause the long term bonds' intertest rates to rise. Under these conditions, the U.S. bonds will become more attractive compared to the bonds of the countries with higher risks. Financial reports point specifically to the five risky emerging countries. U.S. bonds which become more attractive compared to the government bonds of these countries means a decrease in net capital entering into these countries (note: does not have to be necessarily net exit). The first effect of this is a much higher exchange rate and interest rates. Then there will be a dropping in the credit growth rate and a lesser investment and growth opportunities due to a less direct borrowing possibilities.
Developments in the inflation and unemployment are playing an important role in the decisions of the Fed. First of all, the Fed wants the unemployment rate to drop permanently below 6.5 percent and wants it to drift towards the normal level of 5.5 percent as it is customary. Already the unemployment rate was 7.5 percent in the middle of 2013 and it was not expected to come to the threshold of 6.5 percent in a short period of time. However, the unemployment rate fell faster the expected in recent months. According to the data released Friday, it showed a drop to 6.7 percent in December and thus the threshold was approached. In this context, one would ask the following question: will the Fed accelarate the gradual termination of the operations regarding the monetary expansion which it started in December and will it start the process of raising the interest rates shortly after the conclusion of this operation?
In order to be able to answer this question, the unemployment data alone is not enough. The inflation is also very important for the Fed. It wants the inflation to stay at 2 percent in terms of price stability target. However, currently the inflation in the U.S. is clearly under this level. This phenomenon makes the Fed nervous. If the inflation was 2 percent instead of being that low in a period where the unemployment rate is 6.7 percent and is showing a tendency to drift lower, one would expect the Fed to bring forward the monetary tightening steps and to increase the intesity of the tightening.
Meanwhile, there is another indicator that we have been hearing in the past few months but which has not been highlighted in a very strong manner by the Fed: the labor force participation rate. This rate has been declining in the past few years. The decline rate in the labor force may also occur because of the decline in the rate of the labor force participation. For example, unemployed persons may lose hope in finding a job. In order for a person to be counted as unemployed, he must both be unemployed and supposed to be looking for a job. If he does not look for a job, he is regarded as gone out of the labor force. The Fed does not see the rate of unemployment to be reduced in this way as a healthy development. But lately, the declarations from the Fed officials point out to the aging population regarding the decrease in the labor force participation; it is regarded to be natural. In this case, one can expect the Fed to terminate towards the Fall the operation it started in December. Stated differently, one should not expect from the Fed to apply earlier the end date of the operation in a way that will disturb the emerging countries or to reduce further the amount of bonds that it buys every month. But if the inflation were to rise to 2 and because the unemployment rate is near 6.5 percent, the possibility of disturbing decisions for the emerging countriees is substantial. In the coming months, the market experts' main topic of discussion is going to be the inflation and the unemployment rate. Under these circumstances, we can only hope for the best...
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