The US consumer is paying back debt. Within a couple of years, this little critter may once again be the lynchpin of global economic growth. But if US consumers return to normal, does that not mean US interest rates will do so too?

The Fed has already dropped hints about the imminent end of QE. Although frankly it may not be until next year that we see it come to a complete end, and interest rates of 5 per cent are surely at least two years off, maybe a good deal longer.

But the markets are already pricing in the changes.

You may recall that two or so years ago, the Brazilian finance minister accused the US of engaging in currency wars. He said that QE was forcing the dollar down, making the Brazilian real less competitive. By the end of last year and early this year, we heard less about that, because rising inflation in Brazil meant that it rather suited the country to have a relatively expensive currency.

But the Fed is no longer the demon that is using artificial means to devalue the dollar; now it is the demon that is dropping hints about ending QE. You can almost hear the rate setting committee’s maniacal laughter emerging from the catacombs of the Fed, like the evil villain in a Hammer horror movie – at least that is how some might interpret it.

Writing in the ‘Telegraph’, Ambrose Evans Pritchard suggested that Brazil may not even have enough reserves to stop recent falls in the real becoming a rout. Brazil has scrapped a financial transaction tax on foreign investors, and upped interest rates. The markets are rattled. The markets are pricing in further hikes in interest rates. But growth in Brazil is falling. It’s not a good combination – rising rates at a time when growth is anaemic

Neil Shearing, chief emerging markets economist at Capital Economics, said: "Not only is growth likely to remain weak, but food inflation also looks set to fall sharply over the second half of the year. This alone could knock up to 1.5per cent -pts off headline inflation.” He said: “We are sticking to our view that this will be the shortest tightening cycle in Brazil’s modern history.”

But currencies have fallen across much of the emerging world. The South African rand has taken a beating, and Indonesia’s central bank surprised markets by increasing interest rates.

We appear to be entering an era in which good news out of the US is leading to speculation that US monetary policy will be tightened faster than the Fed has suggested. This in turn is creating a stronger dollar, and putting emerging markets’ currencies under pressure leading to higher interest rates, and speculation that they will rise further.

Good news in the US has started it all, but one side effect has been panic.

© Investment & Business News 2013