Fed‘s move to cut asset holdings to increase rates in emerging markets

The move by the US Federal Reserve to reduce its massive asset holdings is expected to increase interest rates in emerging markets as a strong US dollar could spark equities fund outflows, a local think tank said Tuesday.

The Fed is widely predicted to begin gradually scaling back the size of $4.5 trillion in Treasury bonds and other bond assets from September, as it has already raised interest rates from record lows set following the 2008 financial crisis.

According to a report by local think tank Woori Finance Research Institute, the Fed may cut its asset holdings to about $2.9 trillion by 2021. 

In line with US rate hikes, the move would shrink liquidity provided during and after the crisis, the institute said.

"The plan by the Federal Reserve to cut its asset holdings is unprecedented and nobody can precisely predict what will happen," said Song Kyung-hee, a senior researcher at the institute.

With central banks in other advanced economies also showing signs of rate hikes, the Fed's move could cut global liquidity, Song pointed out.

The global financial market could see a repeat of the "taper tantrum" in 2013, when the markets were shaken over the Fed's first indication of slowing asset purchases, Song said. (Yonhap)