In 2021-22, economists overwhelmingly predicted a US recession following the Fed's most aggressive rate hikes since the 1980s. By late 2022, 85% of FT-polled economists expected a 2023 downturn. Stocks fell nearly 20%, bonds suffered historic losses, and warnings of emerging market default cascades were widespread. Yet US growth remained resilient in 2022 and accelerated in 2023, with only Sri Lanka defaulting among sovereigns.

New research from Drishan Banerjee, Galina Hale, and Harrison Shieh at the National Bureau of Economic Research explains why. First, a smaller real policy rate increase sufficed to control inflation, as many price pressures proved transitory. Second, countries had more fiscal space to cushion tightening, reflected in lower debt costs despite higher debt ratios. Third, emerging markets were less vulnerable due to higher reserves and reduced dollar-denominated liabilities.

The authors argue "EM aint so EMy any more" — large developing economies now possess vibrant domestic bond markets, flexible exchange rates, and stronger institutions. This structural evolution, combined with better preparedness for Fed tightening, prevented the crises many anticipated.