America's inflation solution could become the world's problem

What will be the effects of the Fed’s efforts to tackle inflation today? It’s not just distant history that counsels caution. In 2013, the slightest hint by Ben Bernanke, then the chairman of the Fed, that monetary tightening was around the corner was enough to send many emerging market economies into a tailspin. The prospect of higher borrowing costs led to capital outflows and currency instability that battered Indonesia, Brazil, India, South Africa and Turkey with particular severity. The decade that followed saw sluggish performance for many emerging market economies.

Conditions are now ripe for the Fed to precipitate another global crisis. Of particular concern are extremely high levels of emerging-market debt. The International Monetary Fund estimates that about 60 percent of low-income developing countries are experiencing debt distress or are close to it. Sri Lanka’s recent default may be the first domino to fall. Tighter monetary policy in the United States will push many other countries to raise their interests rates to prevent capital flight and currency instability. But this will contract their economies, threatening recovery from the pandemic and delivering another blow to their long-term growth.