By DAVID MCHUGH
ZURICH (AP) â¿¿ A leading lobby group for the world's financial institutions is warning investors not to get caught short in emerging markets if rich-country central banks end their stimulus measures.
The Institute of International Finance said Tuesday that the U.S. Federal Reserve and other central banks cannot continue to flood the market with cheap money through measures such as low rates indefinitely. This could lead to a "boom-bust cycle" in emerging markets if investors are unprepared, the institute warned.
"The risk of market participants being unprepared for a reversal of rates is real and needs to be seriously considered to avoid disruption," the IIF said.
The IIF sounded its warning in a report ahead of the World Economic Forum in Davos, Switzerland, where some 2,500 business and political leaders are gathering to discuss economic risks ahead this year.
The IIF predicted that falling unemployment and an improving economy in the United States may lead the Fed to start ending some of its easy money policies in 2014. In order to shore up the economy in the face of an acute banking crisis, the Fed has cut its main interest rate to near zero percent. It has also pumped new money into the financial system through its purchases of financial assets such as government and mortgage-backed bonds.
Many other banks around the world have also cut their interest rates to record lows and backed policies to help solve one of the main problems of the global economy over the past few years â¿¿ the drying-up of private-sector credit . Despite subdued economic recoveries around the world, many economists say such policy action prevented a worse downturn.
One effect of the low interest rates around the world is the increase in investments into faster-growing emerging countries â¿¿ where money can earn a better return.