The Federal Reserve raised its benchmark interest rates for the first time in almost a decade in December 2015. At the time, the U.S. central bank had forecast four further rate hikes in 2016. But as global markets turned volatile at the start of this year, the Fed became dovish. That's why last week’s minutes came as a surprise for most market participants.
The minutes of the Fed’s most recent FOMC showed that the central bank is considering a rate hike at its June meeting. If the Fed does hike rates at its June meeting, there will be room for further rate hikes later in the year. Tighter monetary policy from the Fed is a negative for emerging markets.
After looking at the five-year chart of the BMO MSCI Emerging Markets Index (ETF) (TSX: ZEM), it becomes quite clear that the fund benefits when the U.S. Fed is easing. Apart from the Fed, the fundamentals of several emerging markets also look quite weak right now. Brazil is headed for another recession this year, China is seeing a slowdown and other commodities-dependent emerging markets are also struggling.
