According to a report from the Wall Street Journal, "Fed officials have become more optimistic about the U.S. economic outlook in the past few months. Though job gains slowed in December, the growth rate of gross domestic product appears to have accelerated to well over 3% in the second half of 2013. The U.S. Commerce Department will release its first estimate of the fourth quarter growth rate Thursday morning".
"Some of the headwinds that have been holding back the U.S. recovery—including financially strained households and restrictive government tax and spending policies—appear to be receding. The Fed is forecasting growth can be sustained at 3% in 2014 and above 3% in 2015 without sparking inflation".
"That rosy outlook stands in contrast to the deepening gloom building in emerging economies—especially places such as India, South Africa and Turkey—where central banks find themselves battling high inflation and declining currencies with interest-rate increases that threaten to choke off growth".
Moreover, the Fed extended an experimental program that it could someday use to manage short-term interest rates. Known as a "reverse repo" facility, the program uses the Fed's portfolio of bonds as collateral for loans to market participants and uses the rate on those loans to influence market rates. The experiment was set to expire Wednesday, but the Fed extended it for a year in an effort to hone the tools it will use for an eventual increase in interest rates.
The Fed could veer from its plans if its outlook for growth, inflation or unemployment changes substantially, but Wednesday's move suggested officials were inclined to stay the course.
Ms. Yellen still faces a host of challenges, the first one being the emerging-market selloff. For now the Fed doesn't see signs that it is spilling over into a larger problem that could damage the U.S. financial system or economy. The Fed has on rare occasions responded to shocks overseas, but only after they became severe enough to threaten the U.S.
Today, some market observers see the Fed as being a cause of troubles abroad. In one of her first experiences as a top Fed official in November 2010, Ms. Yellen traveled to Basel, Switzerland, and was taken aback by criticism from counterparts about a round of bond buying the Fed had just launched, according to people who were there. They complained that the tides of money unleashed by Fed bond-buying programs were washing out of the U.S. and into emerging markets, which in turn led to overheating in some spots. Now as the Fed withdraws, it is being blamed for sparking capital outflows from these markets.
"It's really up to emerging markets to find appropriate tools to balance their own growth," Mr. Bernanke said in 2011, when the Fed was being blamed for sparking higher food and energy prices abroad.
The emerging-market correction, traces back to worries about economic growth in China and the Fed's pullback from its QE, said Gerardo Rodriguez, a senior investment strategist with BlackRock's .
The root cause of the turmoil lies within emerging markets themselves. They(many) grew complacent during the boom years, failing to push forward with needed structural reforms and letting their economies overheat, he said.
