Federal Reserve Chairman Ben S. Bernanke tried to refute arguments the U.S. central bank’s record stimulus is causing destabilizing flows of capital to emerging-market economies.
“It is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies,” Bernanke said today in prepared remarks for a seminar in Tokyo on the last day of International Monetary Fund annual meetings.
His comments contrasted with those of IMF Managing Director Christine Lagarde, who told the same audience that such easing is likely to cause large and volatile flows that risk leading to “overheating, asset-price bubbles and the build-up of financial imbalances” in emerging economies, even as she applauded Fed efforts to boost growth.
Divisions between policy makers over such issues underscore the challenge of forging a unified response to what Lagarde described today as the global economic “malaise.” South Korea’s Finance Minister Bahk Jae Wan said yesterday that the IMF meetings failed to secure agreement and the world has a “leadership problem.”
Bernanke said that recent research, including studies by the IMF, “does not support the view that advanced-economy monetary policies are the dominant factor behind emerging market capital flows.”
U.S. central bankers cut the benchmark lending rate to a range of zero to 0.25 percent in December 2008, and last month said that such low levels are “likely to be warranted at least through mid-2015.” The Fed initiated a third phase of so-called quantitative easing on Sept. 13, purchasing $40 billion of mortgage-backed securities per month, and said this will continue until the outlook for jobs improves “substantially.’
The MSCI Emerging Markets Index has risen 1.9 percent in the month since the Fed began the third round of stimulus, and the BSE India Sensitive Index, or Sensex (SENSEX), is up 3.8 percent. In China, the Shanghai Stock Exchange Composite Index (SHCOMP) has declined 1 percent in the period.
Lagarde made a plea to policy makers to avoid discord on such issues as the management of capital flows, saying that “disagreements may be unavoidable, but we must not forget that we all have a stake in global financial stability. It is important for us to stay at the table and work through these issues.”
Bernanke said differences in expected returns are the most important determinant of capital flows, and the rebound in emerging markets from the global financial crisis “provided still greater encouragement to these flows.”
“Any costs for emerging market economies of monetary easing in advanced economies should be set against the very real benefits of those policies,” the Fed chairman said.
Slowing growth in emerging market economies this year in part results from decelerating exports to the U.S., Europe and other advanced economies, he said.
Brazilian Finance Minister Guido Mantega vowed in a statement delivered at the IMF’s annual meeting to do whatever is necessary to stop the “selfish” monetary policies of some developed nations from hurting his country’s economy.
“I have been arguing that ‘currency wars’ will only compound the world’s economic difficulties,” Mantega said. “Trying to grasp larger shares of global demand through artificial means has many side effects. It is a selfish policy that weakens the efforts for concerted action.”
Brazil reduced its benchmark rate to a record-low 7.25 percent this month, has imposed barriers on capital inflows and purchased dollars in the spot and futures markets to weaken the real and help manufacturers. The real has declined about 9 percent in 2012, the biggest drop among the dollar’s 16 most- traded counterparts.
Philippine central bank Governor Amando Tetangco said in an interview in Tokyo last week that he is “watchful” of the challenges to monetary policy in emerging markets presented by the Fed’s actions. China also expressed concern at the possible side-effects of quantitative easing.
“Monetary easing that supports the recovery in the advanced economies should stimulate trade and boost growth in emerging market economies as well,” Bernanke said, echoing comments by Fed Vice Chairman Janet Yellen at the IMF meetings. “Assessments of the international impact of U.S. monetary policies should give appropriate weight to their beneficial effects on global growth and stability.”
Bernanke has stepped up accommodation as the central bank failed to meet its dual mandate to achieve maximum employment and stable prices.
The personal consumption expenditures price index rose 1.5 percent for the 12 months ending August following a 1.3 percent gain in July. That’s below the 2 percent target set by the Federal Open Market Committee in January. Also, the 7.8 percent unemployment rate in September exceeded Fed officials’ longer- run full employment estimate of 5.2 percent to 6 percent.
Bernanke said the pace of growth has been “insufficient to support significant improvement in the job market.”
Still, by announcing open-ended purchases in September and by making them contingent on improvement in labor conditions, the public should have greater confidence “the Federal Reserve will take the actions necessary to foster a stronger economic recovery in a context of price stability,” he said. He also said the open-ended purchases provide the FOMC “with flexibility in responding to economic developments.”
“An easing in financial conditions and greater public confidence should help promote more rapid economic growth and faster job gains over coming quarters,” Bernanke said.
A Fed dollar index weighted for trade against a group of trading partners has fallen 4.8 percent since the end of August 2007, the month the financial crisis began.
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