DAVOS, Switzerland - The International Monetary Fund's managing director warned Saturday of the risks posed to global economic recovery from the reduction of the U.S. Federal Reserve's monetary stimulus and falling prices in the eurozone.
Despite growing evidence the global economy is faring better than it has for years, Christine Lagarde said policymakers around the world have to be alert to the potential repercussions from the Fed's "tapering," a policy change it decided to embark upon in December.
So far, the move has been minimal - it has reduced the amount of bonds it buys each month by $10 billion to $75 billion - but many economists think that it could end this year if the U.S. economic recovery gains steam.
Head of the International Monetary Fund Christine Lagarde, right, gestures as she speaks while Governor of the Bank of England Mark J. Carney, sits next to her during a session at the World Economic Forum in Davos, Switzerland, Saturday.
A demonstrator walks in the street with a gas mask during a protest against the Davos World Economic Forum, WEF, on the side line of the 44. Annual Meeting of the World Economic Forum, WEF, in Davos, Switzerland, Saturday.
Over the past few years, the Fed's stimulus, in its various guises has had a big impact on financial markets. As well as shoring up stock markets around the world, the new money created by the stimulus has flown to emerging economies as investors sought out better returns. Currencies, such as the Indian rupee and the Brazilian real, have been beneficiaries. The withdrawal could prompt a reverse in those flows and see their currencies come under pressure.
"This is a new risk on the horizon and really needs to be watched," Lagarde said in a discussion about the global economic outlook at the World Economic Forum.
Though the shockwaves that have hit Argentina this week weren't specifically about tapering, the turmoil the country's currency experienced - it fell by nearly 15 percent on Thursday alone - was felt throughout the world, prompting stock markets to post broad-based declines.
Lagarde also cautioned about the outlook for the 18-country eurozone. Though the eurozone has emerged from its longest-ever recession and many of the bailed-out countries appear headed for modest growth, inflation has fallen sharply. At last count, it was down at 0.8 percent in the year to December, way below the European Central Bank's target to keep price rises just below 2 percent.