It’s all very well removing the punchbowl from your own party

It’s all very well removing the punchbowl from your own party. But what about when the rich family next door have been supplying liquor to the neighbourhood’s teenagers for the best part of a decade and eventually decide to stop?

The Federal Reserve’s meeting next week, at which it may raise interest rates after leaving them on hold for nearly seven years, has naturally raised concern among emerging markets. Before this year’s falls in commodity prices and currencies, the two defining episodes in EM assets since the global financial crisis have been the taper tantrums of mid-2013 and early 2014 at the very prospect of the Fed removing monetary stimulus

This week the World Bank’s chief economist, Kaushik Basu, weighed in on the subject, saying that a premature Fed rate rise could wreak havoc across emerging markets, leading to further destabilising capital outflows. It may seem unusual, then, that several EM policymakers themselves seem quite relaxed at the prospect. At the corroboree of monetary policy experts at the Fed’s annual conference in Jackson Hole, Wyoming, recently, several EM central bankers lined up to say that the US might actually be better getting on and raising rates sooner rather than later

It was notable that one of the most prominent was Raghuram Rajan, governor of the Reserve Bank of India, who told the Wall Street Journal that, from an emerging market perspective, it might be preferable to have “a move early on and an advertised, slow move up” than an abrupt tightening later. Early last year, Mr Rajan broke the usual central bankers’ omertàabout each other’s actions by explicitly criticising the Fed’s decision to start slowing its asset purchases under its quantitative easing programme

To some extent, as in Mr Rajan’s comments, the EM central bank enthusiasm for a Fed increase simply reflects tactical considerations: if it were done when ’tis done, ’twere well it were done quickly. If the Fed is seen to be holding off because of fear of the market impact, the US central bank could get into a destabilising game of chicken with investors

But it also reflects irritation with those liberally minded parents down the road and the effect of super-low interest rates on encouraging EM borrowing over the past decade. The flood of “currency war” accusations in 2010-11 that the Fed was in effect driving down the dollar mainly came from finance ministries rather than central banks. But there is no doubt that a flood of cheap money into their economies that drove up their exchange rates made their task as monetary policymakers more difficult

In certain countries — Brazil and Turkey leap to mind — easy money made it simpler for governments to run loose fiscal policy, thus worsening the exchange rate overvaluations and the size of corrections when they came. More capital outflows and tighter credit conditions may force more domestic adjustment, but adjustment had to come at some stage

The varying confidence with which central banks face a Fed rate rise — and the prospect that it will push their currencies down further — reflects their economic positioning and credibility. For China, it will exacerbate their problems of capital outflow: Yao Yudong of the People’s Bank of China’s research institution blamed the prospect of a Fed increase for turmoil in Chinese financial markets and said a rate rise should be delayed. Central banks in Brazil and Turkey have already faced the unenviable task of tightening policy to squeeze inflation out of economies heading into recession. More falls in exchange rates and capital outflows will make their task yet harder and are likely to keep domestic policy tighter for longer

EMs with direct exposure to the US economy may have to raise rates in response to a Fed rise but still welcome it, assuming it means that the US is growing sufficiently quickly to offset the contractionary impact with an expansion in export demand. Agustín Carstens, governor of the Mexican central bank, has said that he would like a tightening even if he had to follow suit

For economies such as India, a net commodity importer with stable inflation and relatively little recent capital outflow, the central bank will most likely be able to keep cutting interest rates, moving in a different direction to the Fed. Mr Rajan has done a lot to get on top of inflation and instil credibility in India’s monetary policy since his appointment in September 2013, which no doubt explains his changed attitude to the prospect of a Fed tightening

Central and eastern Europe, or at least the more westerly net commodity importers, also have relatively little to fear from a Fed rate rise. In Poland, where interest rates have been at 1.5 per cent since they were cut in March, the recent falls in commodity prices mean the central bank may be able to leave rates on hold for longer, and is very unlikely to have to react quickly to a move by the Fed

The horror about a Fed tightening no doubt owes something to history, at least for those with long memories. The sustained rise in US interest rates that began in 1994, apart from causing the famed bloodbath in the Treasury market, also led to some of the worst EM experiences in modern times, sparking the Asian and Russian financial crisis three years later. But those were crises of dollar-pegged exchange rates, where US monetary policy was much more directly imported into the economies concerned

Although the private sector has borrowed heavily in dollars in some EMs, governments are currently much less exposed than in earlier eras. Current account deficits have also come down considerably in many EMs since the taper tantrums of 2013 and 2014

The prospect of higher US interest rates next month will not be filling anyone with glee, but many EM central bankers are sounding much more confident than their finance ministry counterparts and more relaxed than they were before. All parties have to end at some point: the parents of those guests who were relatively abstemious are more likely to face their ensuing hangovers with equanimity