The period of loose monetary policy might be over, as the US Federal Reserve has been tapering its bond purchase since November. In fact, the market has been expecting the Federal Reserve to tighten its monetary policy.

Inflation in the United States has reached the highest level in 40 years which, along with uncertainties caused by new rounds of novel coronavirus infections, may weigh down growth expectations for 2022. The Fed has accelerated the pace of normalizing monetary policy to rein in inflation without affecting the economic cycle, in order to ensure a soft landing. Yet the spillover effects of the Fed's policy adjustment cannot be ignored.

According to the Institute of International Finance, with the exception of China, overall nonresident capital flows into emerging economies turned negative at the end of November for the first time since March 2020, and emerging economies are likely to see varying degrees of capital outflows in the future.

Especially, when the Fed begins to raise interest rates in 2022, a stronger dollar will exert more pressure on the currencies of emerging economies.

Because of high inflation and the risk of the Fed's monetary policy reversal, some emerging economies have raised their interest rates, but that is hampering their economic recovery. After raising the interest rate seven times in 2021, Brazil experienced a technical recession in the third quarter of 2021, but its inflation remained in double digits and it still faces the risk of stagflation.

If the Fed starts raising interest rates, global liquidity may tighten and asset prices could become more volatile. The changes in asset prices, the disappearing wealth effect and the bursting of the real estate bubble are all likely to drag down the US real economy, which in turn would upset the global financial market.

As liquidity is still abundant and with the inflection point not yet in sight, other economies should make forward-looking policy arrangements to boost their economic resilience and mitigate the potential impact of the Fed's possible monetary policy tightening.

Thanks to the largely effective containment of the pandemic, China's economic recovery has been relatively strong. Compared with the Fed and other central banks of developed economies, the People's Bank of China has more room to adjust its monetary policy and can use it prudently and flexibly to provide more support for the real economy while fending off possible risks.

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