A QE Taper， Sooner or Later

　　At a meeting on September 18 the Federal Reserve unexpectedly announced that itwould maintain its $85-billion monthly bondbuying program， known as quantitativeeasing (QE). The decision came when mosteconomists and investors expected a QE taperingand global capital was flowing back todeveloped countries.

　　Consequently，major economies had undergone sharp fluctuations. Gold prices jumpedto their highest since January 2009 for a singleday， while the yield rate of five-year U.S. TreasuryNotes witnessed the most drastic decline since March 2009. The exchange rate of the U.S. dollarplunged， while that of emerging economies’currencies， with no exception， shot up.

　　The Fed’s refraining from a QE taper had greatly alleviated the pressures on emerging markets， but it didn’t mean there was nodanger.

　　On September 20， James Bullard，President of the Federal Reserve Bank of St.Louis， suggested the Fed could still scaleback its QE gradually in late October， if thedata was strong enough. Esther George，President of the Federal Reserve Bank of Kansas City， even blamed the decision fordoing damage to the Fed’s credibility.

　　Comments by the two presidents promptly damped the optimistic mood. Asa result， gold prices as well as America’sthree major stock market indexes (DowJones， S&P 500 and NASDAQ) erased the growth gained before. Under such circumstances，emerging economies may have toface another tough period.

　　Why is it that the attitudes of Fed officials can trigger such chaos？ The answer is QE isstill influential in the market. For emergingeconomies， pressures have been present atall times. Although the Fed didn’t announcea QE scale back， the general trend has notchanged. In the mid- and long-term， the delaywould not make a difference.

　　Since the scaling back of the QE would happen sooner or later， the increase of interestrates by the Fed would start anotherround of capital backflows across the world.The latest forecast released in September showed that 10 out of the 17 Fed official spredicted short-term interest rates wouldnot exceed 2 percent until the fourth quarterof 2016， and 14 of them believed the Fedwould not begin to lift interest rates until2015 or 2016.

　　Obviously， the QE withdrawal is a slow process.

　　However， once it begins， the Fed would edge toward tightening monetary policies.Then， uncertainties in the global currency marketwould wear out emerging economies.

　　The delay will give emerging markets a chance to breathe， especially for high deficitcountries like India and Indonesia. An expectationfor cheap money in the marketwould facilitate financing. Nevertheless， these countries should go a head with their ongoingadjustments in fiscal and monetary policies， andstrive for a soft landing amid a prospective capitalwithdrawal.

　　As far as China is concerned， U.S. dollarout flow provides an opportunity for the yuanto go global. Considering emerging economies，especially those in Asia， have been under theinfluence of the Chinese economy for years， awider presence of the yuan in the region wouldenhance the stability of the Asian economy andreduce dependence on the U.S. dollar.