The "normalisation" of monetary policies in advanced economies (the US is far more advanced in normalising its policies than others) should prove to be "manageable’’ for emerging economies, he said.

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That’s not necessarily a view shared within those economies, which only last month experienced $US12.3 billion of net outflows of foreign capital.

The Institute of International Finance has estimated that a 10 per cent appreciation in the trade-weighted value of the US dollar would reduce net annual capital inflows to emerging markets by $US95 billion. The dollar has appreciated by 5.3 per cent on a trade-weighted basis in less than two months.

It isn’t just US monetary policy that could have significant spill-over effects on emerging economies but also the trade confrontation with China and, more recently, others.

The dimension to US policy that caused India’s central bank governor, Urjit Patel, to plead for a change to the Fed’s plans in a piece he wrote for the Financial Times at the weekend is, however, the normalisation of its balance sheet.

Last October the Fed began reducing the level of reinvestment of the proceeds from maturing treasury bonds and mortgages that it holds. That hoard swelled from less than $US1 trillion before the crisis to $US4.5 trillion as the Fed embarked on "quantitative easing’’ programs.

The staged shrinkage of its balance sheet was carefully constructed and communicated. It started at US10 billion a month, rising to $US20 billion a month after three months, and then adding a further $US10 billion each quarter until it reaches $US50 billion a month in October this year.

In effect, the Fed will withdraw about $US230 billion of liquidity from US bond and mortgage markets this year and far more in 2019.

That will unfold even as - due to Trump’s tax cuts and increased spending - US Treasury will be issuing about $US1 trillion a year of net new bonds. Treasury has also flagged that the issues will be predominantly at the short end of the yield curve. It is shorter term rates that most impact financial markets and capital flows.

Patel described the coincidence of the Fed’s reducing reinvestment and the increase in bond issuance as a "double whammy’’ for global markets. Dollar funding, he said, had evaporated and emerging markets were experiencing a sharp reversal of foreign capital inflows, impacting emerging market bonds and currencies.

He urged the Fed to "recalibrate’’ its normalisation plan and slow the pace of its balance sheet contraction by enough to dampen the shortage of dollar liquidity caused by the higher US borrowing requirement.
Since the last emerging market crisis, the Asian financial crisis in 1997, developing economies have greatly increased their domestic pools of capital and reduced – in relative terms - their exposure to US-dollar funding.

They still have, however, large exposures, with estimates that emerging market economies have added $US40 trillion of debt since 2008, with perhaps $US8 trillion of that increase in foreign currencies.

India, Indonesia, Turkey, the Philippines, South Africa and, most visibly, Argentina are already being adversely impacted by the effects on capital flows of the rising US rates, stronger dollar and higher energy prices.
Whether or not they generate another crisis in the developing world, the Fed’s policies – and Trump’s fiscal and trade policies – are exporting stress to the developing economies.

Given the complex interactions between economies within a global economy it is difficult to assess the likelihood of those stresses rebounding on the US economy enough to cause the Fed to consider altering course. For the moment, at least, it will inevitably remain far more interested in the prospect of the US economy over-heating than on the potential for its policies to cause meltdowns elsewhere.