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he United States Federal Reserve increased on March 15 the Fed funds rate — the rate in which banks charge overnight loans to other banks — by 25 basis points to a range of between 0.5 and 0.75 percent. The increase was the second since 2015 and third since the global financial crisis of 2008 when the reference rate was reduced to zero percent to stimulate the weak economy recovering from the crisis.

Much had been said about the Fed’s move to return to its normal operation of conventional monetary policy. Emerging economies have been active in voicing their concerns over the risk of sudden capital reversals, which they suffered when the Fed ended its program of purchasing securities, the quantitative easing (QE) in 2013, as infamously known as taper tantrum.

Why have there been no complaints, let alone tantrums of capital reversals from the emerging economies, as happened after the tapering off in 2013 or after the first rate increase in December 2015? In addition, after the Fed’s decision, instead of the usual capital reversal and appreciation of the US dollar, there was even a slight weakening of the US dollar against the euro and yen. The rate increase has also been followed by a halt in the US stock market bull, which started from the time Donald Trump won the US presidential election.

The rate increase is the same and similar to the taper, but the environment and expectations are not the same, and that is why the implications have been different as well. Whether the Fed’s decision was for ending or decreasing the program of bond purchases or raising the Fed funds rate, all are policy actions to tighten liquidity carefully, designed with a view to encourage development of the macro indicators of the economy, like very low unemployment.

Since the moves are from a peculiar condition of very low or even zero interest rate to a positive rate of interest, they are shifts from what has been known as unconventional monetary policy to normal or conventional.

One of the usual implications of such moves is for capital to flow back to the country raising the rate, in this case, the US. In the past, the flows have been from the emerging economies, which previously received these funds from the US and other advanced economies. This was what happened that caused the taper tantrum after 2013 and debates on the lifting off after 2015.

On both occasions US dollar appreciation and the depreciation of the emerging economies’ currencies followed, accompanied by declines of international reserves in the emerging economies.

However, we were not observing these phenomenons after the Fed funds rate 25-point increase in mid-March. As stated before, there has not been much capital outflow from the emerging economies, including Indonesia, lately. This has been the case even when no central bank in the emerging economies decides to raise their respective reference rates. Not much movement of funds from fixed income securities (bonds) to equities.

Instead of strengthening, as expected after the rate increase, the US dollar depreciated. What has been going on? Casual observations tend to conjecture that apparently doubt started creeping in the market regarding the capability of the Trump administration to efficiently deliver his campaign promises in economics, such as huge expenditures for infrastructure development and defense, tax cuts and market liberalization. This came up specifically due to the wobbly process in replacing the Affordable Care Act or Obamacare with a new one, the American Healthcare Act.

Casual observations could come up with some factors both domestic and external to explain why we are not seeing many ripples from the recent increase of the Fed funds rate and that its implications seem to be contrary to the prediction of the theory.

Let’s start with external developments. In addition to what was alluded above, I think the shift of market perception from bullish to doubt regarding the effectiveness of the Trump administration in delivering its campaign promises has been significant.

The notion that President Trump’s choices of many former Wall Street CEOs in the government had raised expectation that his policies would be pro-business. And since in both chambers of Congress his party holds majority seats he would get the support he needs to implement his campaign promises.

Similar to some Trump voters who started getting disappointed for not benefiting, at least not immediately, from the budget or failure of resolving issues in health care, the market starts worrying that the higher economic growth may not come anytime soon and that a tax cut program may not be smoothly materialized as well. So the bullishness in the equities market has to be corrected and come to a halt.

Global development observations have been more positive regarding economies that previously caused worries in the market. China’s growth rate is indeed no longer in the double digits, but the concern of shadow banking problems has been such that the markets believe China would continue to develop well with the new rebalancing policy of development.

In other words, there is no hard-landing for China.

The move out from unconventional monetary policy by central banks of advanced economies has not been in unison. We are observing that the US seems firm in normalizing its monetary policy by lifting off of the reference rates and may be addressing the ballooning Fed balance sheet later. However, this move has not seemed to cause the European Central Bank or the Bank of Japan to follow suit.

All of these put the pull in terms of the strength of the tightening of monetary policy and thus its implications on emerging economies have also been less severe. In a way, emerging economies have been saved by the bell such that the Fed rate increase has not caused any meaningful disturbance, let alone tantrums in the emerging economies, including Indonesia.

With respect to domestic developments, the emerging economies learned well from past mistakes and experiences. The contrast of the severe adverse effects of the Asian Financial Crisis (AFC) of 1997/1998 on the emerging economies of Asia and that of the Global Financial Crisis (GFC) of 2008/2009 had shown the resiliency of the emerging economies of Asia and their ability to learn.

Of course, as a student of financial crisis, I subscribe to the notion that the epicenter and periphery of crisis is just like in an earthquake or tsunami. So, in the AFC, the crisis countries then, the epicenters of the crisis were here —Indonesia included — while in the GFC all Asian economies were not the epicenters, but peripheries. By nature, the devastation from financial crisis is more severe at the epicenters than the peripheries.

However, no country can afford to be complacent in the face of an environment whereby the world economy is engulfed with high risks and uncertainties come from economic, financial and trade relations, geopolitical development, social and climate change as well as technological risks.
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The writer, a former Bank Indonesia governor, is a professor of international economics at S. Rajaratnam School of International Studies, Nanyang Technological University, Singapore and emeritus professor of economics, the University of Indonesia.