Responsible for managing the globe’s currency franca, the US Federal Reserve has long been the world’s most influential central bank. Its policy decisions have a direct impact on global exchange rates, speed up or reverse the flow of funds into and out of the United States and generally make life easy or difficult for the world’s other central bankers.

A few foreign central bank heads have been critical of the Fed’s quantitative easing (QE) program, notably Brazilian finance minister Guido Mantega who believes his country has suffered from the policy. However, most have enjoyed the stimulatory effects of easy US dollars chasing higher foreign yields. They heaved a huge sigh of relief when the Fed’s Federal Open Market Committee (FOMC) announced last week that it had decided not to begin tapering its asset purchases, at least for the time being.

With Ben Bernanke’s term as Fed Chairman up in January, it doesn’t seem likely that the Fed will reverse course for the balance of 2013. Bernanke appears satisfied to let his successor decide on the timing of the taper and, on top of that, the consensus opinion of the FOMC showed a weakening outlook for economic growth.

At the June FOMC meeting, the forecast called for gross domestic product (GDP) growth of 2 percent to 2.3 percent this year and 3 percent to 3.5 percent in 2014. The September meeting was less optimistic, as this year’s range dropped to between 2 percent and 2.3 percent and 2.9 percent and 3.1 percent next year.

Inflation expectations also fell, so the Fed definitely feels that it still has plenty of leeway to continue its program of QE.

Bernanke’s likely successor is Janet Yellen, who currently serves as Vice Chairwoman of the Federal Reserve. Yellen also seems likely to continue QE next year.

Yellen earned a doctorate in economics at Yale, where she studied under James Tobin, a Nobel Prize-winning Keynesian economist. Her public comments since the Fed’s asset purchases have largely emphasized her belief that the Fed should continue to focus on the employment side of its dual mandate. She’s also been a strong backer of Bernanke’s QE program, consistently favoring its continuance.

Yellen isn’t a shoo-in, but the Obama administration has a history of favoring insiders it has worked with in the past. She also has strong support from the liberal Senate Democrats who successfully torpedoed Larry Summers’ candidacy.

Summers’ run was tainted by his close association with Wall Street banks and his role in the Clinton-era financial deregulation that paved the way for the credit crisis. It was also expected that a Summers Fed would probably scale back QE sooner than Yellen would.

Yellen’s background shows a strong commitment to academia and public policy; she has never held a position in any of the poorly perceived banks. Her personality is also said to be fairly easing going, a stark contrast to Summers’ who is well known for his acerbic and sometimes bullying demeanor.

The administration probably won’t announce Yellen’s nomination for Fed Chairman for at least another month, to at least maintain the appearance of not capitulating to Senate forces. However, the odds are that Yellen will be the first chairwoman of the Federal Reserve.

A Duo of Doves

Everything outlined above is great news for developing markets.

As I’ve repeatedly pointed out in this publication and Global Investment Strategist, emerging markets can operate independently from the developed world’s credit cycle,  But as I’ve also explained, US monetary policy does have a direct impact on them.

Economists at the Federal Reserve Bank of New York released a research paper earlier this year showing that large-scale asset purchases have the effect of pushing investors into emerging market debt, with a 10 basis-point reduction in long-term Treasury yields resulting in a 0.4 percent increase in foreign ownership of emerging market debt.

In addition to the obvious benefits of increased fund flows, there’s the added bonus of lower borrowing costs for the beneficiary government.

When the Fed backs off its large-scale asset purchases and US domestic rates rise, money will begin flowing home to take advantage of higher yields and lower perceived risk. While most emerging market economies will be able to cope with the reversal of fund flows, this dynamic will inevitably hit their economic performances and their currencies as the dollar strengthens.

There’s a small chance that the Fed might begin tapering after its December meeting, but action isn’t likely in October because there probably won’t be a huge uptick in inflation or marked employment improvement by then. That’s why I think the Fed will hold its course for a few more months, especially with Janet Yellen at its head.

A day of reckoning will certainly come, but it’s at least a year away. Given their academic backgrounds, Bernanke and Yellen are a duo of monetary “doves” who will probably err on the side of overstimulation rather than risk impeding the US economic recovery too soon.

And that’s all to the benefit of emerging markets.

Portfolio Updates

Companhia de Saneamento Basico (NYSE: SBS), Brazil’s largest water utility and better known as Sebesp, has put in a strong rally over the past week on the news that its regulator is on a course to approve customer rate increases in line with inflation.

In recent months a political crisis has developed in the country, as Brazilians take to the streets to protest higher public transit rates, relatively high inflation and a list of other grievances. In response, the government has implemented a moratorium on rate increases and even forced power companies to reduce their rates.

A rate decision by Sabesp’s regulator has been delayed by several months because it has lacked a quorum for a decision; three seats on its board have been vacant. However, in a recent interview, the state energy secretary said that a decision in Sabesp’s favor is likely to come by the end of the year.

Companhia de Saneamento Basico remains a buy up to 19.