This research was published on July 17, 2023

When the U.S. sneezes the world economy catches a cold. Last year, the old adage aptly captured widespread concern about an emerging markets (EM) crisis after the Fed started to raise rates at the fastest pace in 40 years. Large stimulus had delivered an enviable U.S. recovery but also contributed to surging inflation. Now, the world would have to bear the burden of higher U.S. interest rates, putting emerging markets at risk.

But little of that has transpired. Sure enough, much higher U.S. interest rates have exerted their pull on global capital flows, pushing up the U.S. dollar to near all-time highs. The bleak predictions of an emerging markets meltdown, however, have not played out. “Historic cascade of defaults is coming for emerging markets,” read a typical headline from July 2022. Was it a false alarm or a warning of a real crisis that is yet to come?