Don't blame the Fed for everything

THAT the US Federal Reserve was to blame for the collapse in emerging markets (EMs) in 2014 might be a subject of much heated debate among the investment community and academics in the months and even years ahead.

Indeed, there is a school of thought that says the Fed was responsible for inflating risky assets in EMs when it expanded its balance sheet to US$4 trillion with its various quantitative easing (QE) programmes between 2008 and 2013. By the same token, it is the Fed's decision to taper that money expansion which has triggered a flight of capital out of EMs and sent EM stock markets sliding. Clearly, exiting QE is a lot harder than entering.

In the Fed's defence, it could well be that when things go awry, a natural response is to look for scapegoats - and there is none as convenient as the US central bank. After all, even though the EM selloff began in earnest only a couple of weeks ago, weakness first set in on May 22 last year when then Fed chief Ben Bernanke first spoke of tapering.