Moreover, the 2004‐2007 period was one of prosperity and stability across the developing world. Of course, the Global Financial Crisis of 2008 derailed everything, but it is difficult to argue that it was the consequence of the hiking cycle of the mid 2000s. If anything, it might have been the consequence of the lack of a timely normalization. Hence, although there are many common features in the 1994 and 2004 cycles, the consequences were very different. What I want to do in this talk is to identify a few features that help us reflect why this was the case. I think this is useful to extract some lessons for the current process of monetary policy normalization in the US. 1994‐2004 normalization Cycles As a starting point, it is important to notice that the 1994 and 2004 episodes are comparable for two reasons. First, the Federal Reserve started hiking in a context of inflation above 2% and the unemployment rate around 6%. This is of course a simplified characterization of the business cycle, but it offers a good base for comparison. Beyond that, the monetary policy adjustment in the United States looks quite similar in both cases. Not only is the size and speed of the hikes in Fed Funds’ rate comparable.
The increasing relevance of China in the world economy and in world trade following its accession into the WTO, generated a booming effect in commodity markets and world demand that more than compensated the negative effect of increases in world interest rates, giving important support for the balance of payment, fiscal accounts and the investment outlook in emerging economies. We are now at the early stages of a new and historical tightening cycle in the United States. It is reasonable to ask ourselves how comparable the current situation is relative to previous experiences. I want to make a few points here. We expect the Fed to move more gradually than on previous occasions  Why? First, the Fed prefers to err on the side of moving slowly, and markets expect so. In part, as seen in Figure 3, inflation measured as the PCE core is still low compared to its level on previous hiking cycles. Also, neutral rates are estimated to be very low this time, so the Fed considers that monetary policy is not as expansionary as the headline Fed Funds Rate suggests.  Besides, the Federal Reserve is very much aware of the financial stability risks of abrupt changes in rates. The term premium implicit in long term yields is very low, and the taper Tandrum episode of 2013 shows that it can change fast if markets misinterpret the Fed communication.