IMF official warns of market disorder from Fed rate hike

Seoul (Reuters): The International Monetary Fund’s Deputy Managing Director warned on Monday that there is “considerable” risk for negative spillover from the US Federal Reserve’s pending interest rate hike.

“The risk is once market sentiment shifts – possibly triggered by normalisation – yields could sharply increase and capital flows could reverse,” Mitsuhiro Furusawa told an international conference in Seoul. “This process could become disorderly, with impaired liquidity in certain markets or asset classes.”

He added the Fed can reduce the risk of disorderly capital outflows by continuing to communicate its policy intentions, while emerging market economies need to strengthen macroeconomic fundamentals and policy frameworks.

Furusawa also highlighted the importance of implementing structural reforms by emerging market countries to promote strong, sustainable and balanced growth.

Global policy makers have raised concerns of a repeat of the 2013 “taper tantrum”, when world markets took fright at the Fed’s first hint that it might roll back its monetary expansion policy.

The Fed is expected to start raising interest rates before the end of this year.

Furusawa said that countries can cope with market volatility through foreign exchange intervention or capital flow management measures, although they should not substitute for macroeconomic adjustment.

The Deputy Managing Director also said the IMF sees signs of growth rebounding in emerging market countries next year after likely declining for the fifth year in a row in 2015.