The Federal Reserve’s hawkish shift at its June meeting took markets by surprise. Is tighter policy a headwind for emerging markets? Alejandro Arevalo and the emerging market debt team explain why they don’t think so, and how they remain optimistic that global recovery can continue to support EMD through this year and beyond.

A hawkish pivot

Chair Jerome Powell announced last year that the Federal Reserve (Fed) was likely to wait longer before tightening policy than it used to, and earlier this year, Powell had on several occasions indicated that much of the inflation we are seeing would be transitory. Therefore, it came as a surprise to markets when the Fed took policy in a more hawkish direction at its 16 June meeting, citing upside inflation risks. While a sell-off in risk assets was short lived, a stronger dollar and weakening in longer-term interest rates and inflation have so far been sustain