Mexico’s central bank Governor Agustin Carstens called on the Federal Reserve to clarify plans for tapering its $85 billion in monthly bond purchases, saying emerging economies face their “most pressing challenge” from advanced economies exiting stimulus.
Unconventional accommodation has “undesirable side effects” in emerging markets even while helping stabilize the global economy, Carstens said yesterday during a panel discussion at the Fed’s annual policy symposium at Jackson Hole, Wyoming. International Monetary Fund Managing Director Christine Lagarde, in a speech at the same conference, urged policy makers to cooperate more in planning the withdrawal of stimulus.
“What would have the most impact right now would be to have a much better, clearer implementation of the tapering,” Carstens, 55, told central bankers. “If you keep pampering the markets, the inflow of capital can be such that more stability risks can be accumulated in emerging-market economies.”
Data compiled by Bloomberg show emerging-market stocks have lost more than $1 trillion in market value since May, when Chairman Ben S. Bernanke testified to Congress that the Fed “could take a step down” in its bond purchases. Such buying helped channel $3.9 trillion in capital flows to developing nations in the past four years.
The MSCI Emerging Markets Index has fallen 12 percent this year, compared with a 13 percent gain for MSCI’s gauge of shares in advanced economies. India’s S&P BSE Sensex and Indonesia’s Jakarta Composite Index (JCI) both tumbled to 11-month lows this week.
The 20 most-traded currencies among emerging economies have fallen about 4.3 percent in the past three months, data compiled by Bloomberg show. Turkey’s lira this week slumped to a record low versus the dollar.
Indonesian policy makers said yesterday they will increase foreign-currency supply to stem a sliding rupiah. Peru’s central bank sold a record $600 million in the local foreign-exchange market on Aug. 21 to support the sol after it touched a three-year low.
After falling to a four-year low this week, Brazil’s real gained the most in a year as the central bank announced a $60 billion intervention program involving foreign-exchange swaps and loans.
Adapting to advanced countries’ exit strategies is “the most pressing challenge for emerging economies,” Carstens said, noting the “turbulence in financial markets around the world once the tapering talk started.”
The Fed’s quantitative easing includes monthly purchases of $45 billion of Treasuries and $40 billion in mortgage-backed securities to fuel economic growth and spur hiring. The unprecedented easing has inflated the central bank’s balance sheet to $3.65 trillion.
“Speaking with one voice would be very, very important,” Carstens, 55, said to central bankers and economists at the gathering.
“It would be desirable to have a monetary policy coordination,” he said. “To have the central banks of advanced economies to go in different directions, can become a source of instability.”
Lagarde told the conference that officials need to better understand the potential spillovers from monetary policy.
“We need further lines of defense -- lines of defense that reflect our interdependence, our common purpose, and our mutual responsibility for the global economy,” she said at the event sponsored by the Kansas City Fed.
“Swap lines -- along the lines provided by major central banks early in the crisis --can help,” and the IMF stands “ready to provide policy advice and financial support,” she said at the symposium entitled, “Global Dimensions of Unconventional Monetary Policy.”
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