The world economy is about to be stress-tested.
Regardless of whether the Federal Reserve raises interest rates on Thursday, the first tightening of U.S. monetary policy in almost a decade is beckoning.
That poses a challenge for a global economy already buffeted by slowing Chinese demand and volatility in financial markets. Most vulnerable are those emerging nations which binged on cheap dollars and now face tighter credit and a rising greenback.
Such an international backdrop leaves Fed Chair Janet Yellen needing to communicate her policy plans beyond the U.S.'s borders or risk being unable to deliver on them because of fallout elsewhere.
"The Fed has to take account of what the external reaction will be," even if its mandate is for the U.S., said Rob Carnell, chief international economist at ING Bank NV in London. "If it hikes it has to make clear it will be gentle and isn't going to pull the rug from under those economies which are already struggling."
The Fed had a foretaste two years ago of what happens when its message proves unpopular overseas as emerging market stocks fell on signals it was set to slow its bond-buying. Just last month, global equities tumbled on concern China was slumping at the same time as U.S. monetary officials were readying to shift.
Unlike the four past occasions it raised rates since 1988, the Fed is set to act at a time when the global outlook is weakening, with the International Monetary Fund preparing to lower its 3.3 percent forecast for 2015. In 2004, for example, the economy grew 5.4 percent and didn't slip to 3.1 percent until crisis hit 2008.
That conjuncture helps explain why economists aren't bracing for too much.
"The ensuing tightening cycle will probably be among the least aggressive in the Fed's history and policy normalization will remain a multi-year process," said Michael McDonough, chief economist at Bloomberg Intelligence in New York.
The threat of foreign fallout is one reason for the Fed to delay a rate increase this week even as the domestic economy strengthens, Krishna Guha, vice chairman of Evercore ISI in Washington, said in a note.
"The Federal Open Market Committee should take seriously the signal from the markets about EM," said Guha, a former official at the Federal Reserve Bank of New York. "It appears to have underestimated the degree of EM weakness, the dollar strength that would be associated with progress towards lift off, and the scope for these two to interact in unhelpful ways."
The Organisation for Economic Cooperation and Development said the Fed would be right to begin raising rates this week, but it needs to signal it intentions to the rest of the world.
"Do it now to remove uncertainty facing emerging markets, but communicate more clearly the nature of the more gradual path, that's the message," OECD Chief Economist Catherine Mann said in an interview in Paris.
Higher U.S. rates may be welcomed by central bankers in several rich nations, who have argued they would signal confidence in the world's largest economy, potentially boosting risk appetite among investors.
If the Fed is meeting its objectives on inflation and jobs, that's a "plus for the world," European Central Bank President Mario Draghi said on September 3. Bank of Japan Governor Haruhiko Kuroda said on Tuesday that "if the U.S. does rate hike at some point in the future, that would suggest stronger confidence with its recovery."
Those policy makers might also welcome any subsequent gains in the dollar against their currencies given the fillip to exports and inflation that could generate.
A Fed hike also doesn't spell the imminent end to cheap money given U.S. rates would still be historically low. The ECB and BoJ are both buying bonds and stand ready to increase purchases if needed. More than 20 central banks have eased policy this year, while the People's Bank of China's benchmark is still 4.6 percent even after five cuts since November.
"There is plenty of scope for looser monetary policy in other parts of the world to support markets," Julian Jessop, chief global economist at Capital Economics Ltd. in London, said in a note.
There is nevertheless no shortage of people willing to sound the alarm. Billionaire investor Ray Dalio says higher U.S. rates would be the wrong call, and IMF Managing Director Christine Lagarde advises the Fed to wait until 2016.
Most at risk are emerging markets which sucked in cheap dollars and now risk capital flight, sliding currencies and costlier debt burdens.
The Bank for International Settlements, which has long warned of a hangover from sustained stimulus, warned this week that non-bank borrowers have racked up $9.6 trillion in debt denominated in dollars, an increase of 50 percent since 2009, with the amount in emerging markets soaring to more than $3 trillion.
In a forewarning, its economists found a 100 basis-point change in the U.S. benchmark typically implies an increase of as much as 59 basis points elsewhere.
"All this is reminiscent of the old joke about the stranded tourist who, having asked for directions, was told: 'If I were you, I wouldn't start from here,'" Claudio Borio, head of the BIS's monetary and economic department, told reporters.
Highlighting how emerging economies could suffer an exodus of hot money, Fitch Ratings estimated on Monday that capital flows into the 30 biggest developing economies had returned to their pre-crisis levels of about $1.3 trillion a year.
As for which are the most in jeopardy, ABN Amro Holding NV economists identify Brazil, Colombia, Indonesia, Malaysia, Turkey and South Africa as the riskiest.
China may also come under pressure as it tries to support its economy and slow capital outflows a month after devaluing the yuan. Chinese foreign exchange reserves have declined by $434 billion since June 2014, falling by $93.9 billion in August alone.
"A Fed rate hike will put further pressure on the yuan, making the PBOC's task of maintaining a stable yuan-USD exchange rate more difficult," said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight in Singapore.
For all the worry, Adam Posen, president of the Peterson Institute for International Economics, identifies Mexico and Poland as developing economies that will fare better. The World Bank said on Tuesday that as long as financial stress is avoided, emerging markets should suffer "only modest impact" form a more hawkish Fed.
Posen argues many emerging market central bankers want the Fed to act so as to clear up uncertainty in markets.
"A vast majority of emerging market central bankers just said get over it," said Posen, a former U.K. policy maker. "I'm not going to argue that tightening is going to cause a global disaster," he said.
_ With assistance from Jeff Black in Frankfurt, Enda Curran in Hong Kong, Toru Fujioka in Tokyo and Mark Deen in Paris.