Taper: World Bank Sheds Light on the Positives

Federal Reserve

The Federal Reserve began to taper down it’s bond buying stimulus program in January. The program of quantitative easing was reduced by $10 billion from $85 billion, and so far it looks like the taper will continue on a slow but steady wind down. The reduction has been controversial, causing some concern that it could lead to negative reactions from the U.S. economy. Those concerns may be unfounded according to a report from the World Bank — as reported by the Washington Post.

The World Bank is expecting that there will be a continuous rise in global interest rates to 3.6 percent by the time the middle of 2016 rolls around. The Fed, on the other hand, had interest rates down to record lows with its bond purchases last year. According to the Washington Post, this economic shift will be slow enough that it will give investors time to adjust their finances to the financial market, likely pulling out of developing markets and looking for the more reliable assets in developed nations.

That said, some have suggested that emerging markets may not be as bad a bet as so many have been saying. Skagen AS, a Norwegian investor with a better track record than even Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM), recently told investors that elections in countries in the Middle East, Africa, and Asia could result in different economic outputs in the coming years.

The World Bank, conversely, said that it puts capital inflows decreasing in coming years, down from 4.6 percent of the Gross Domestic Product for emerging markets, at 4 percent. The stock market’s leap just after the Fed’s taper announcement acts as proof that the World Bank may not have been overly optimistic.

According to the Washington Post, should the World Bank prove wrong, we could see a rate spike of 1 percentage point, the money going into developing nations could fall 30 percent, and interest rates could climb by 2 percentage points with flows dropping by an average of 45 percent.