EM turmoil won’t derail the Fed’s plans

There is no reason to believe that the latest bout of turbulence in emerging markets will prompt the Fed to reconsider future interest rate hikes, since the economic and financial market spillovers are likely to be limited and come at a time when domestic conditions make it difficult to delay additional monetary tightening. A much bigger dollar appreciation, a sharp decline in US equity markets and/or an unexpected financial linkage might force the Fed to reconsider but, if we are right and the current emerging market strains don’t develop into a wider contagion, we are unlikely to see any of those complicating factors.