Federal Reserve Vice Chairman Janet Yellen said Fed asset purchases that boost U.S. economic growth would benefit the world, with emerging nations having the tools to manage excess capital flows.
“It’s not the intention of the U.S. and Fed to make this more difficult,” she said at an International Monetary Fund event in Tokyo today. “On balance, stronger U.S. growth is beneficial for the entire global economy.”
Asian reaction to the third round of so-called quantitative easing in the U.S. is more muted than previously, with the Indian finance minister and his Thai counterpart saying that capital flows can bring benefits, including through investment. At the same time, policy makers in the Philippines and some Latin American nations say they are alert to the danger that inflows of cash will drive up prices and increase the risk of financial instability.
Asked what risk easy U.S. monetary policy poses to emerging markets, Yellen today said that interest-rate differences do influence capital flows and currency values, and that the Fed’s policy is not the main factor driving flows.
Still, the Fed’s easing “is causing challenges to monetary policy in emerging markets,” Philippine central bank Governor Amando Tetangco said in response to Yellen’s comments in an interview with Bloomberg News today. While many emerging nations, including those in Asia, have “enhanced toolkits” to face such complications, responding adequately and appropriately to strong capital flows remains a “short-term challenge” for the Southeast Asian nation, he said.
The announcement of another round of monetary easing in the U.S. brings additional risks to some Asia-Pacific economies, Standard & Poor’s Ratings Services said in a note today.
“If inadequate policy responses to additional monetary easing from abroad fuel further financial leverage, the risks to economic and financial stability could mount, and that could damage sovereign creditworthiness,” said Standard & Poor’s credit analyst Kim Eng Tan.
The International Monetary Fund yesterday cut its global growth forecasts for this year and next, predicting the world economy will grow 3.3 percent in 2012, the slowest since the 2009 recession, and 3.6 percent in 2013. The Washington-based lender now sees “alarmingly high” risks of a steeper slowdown.
Central banks in Asia have stepped up efforts to shield their economies in recent weeks, with the Bank of Japan boosting its asset purchases and the Bank of Korea forecast to cut interest rates tomorrow. India last month unexpectedly reduced banks’ reserve ratios to spur lending and assist expansion.
Indian Finance Minister Palaniappan Chidambaram told reporters after a meeting with U.S. Treasury Secretary Timothy Geithner in New Delhi yesterday that he “raised the concern that it may impact commodity prices and commodity prices may rise,” during their discussion.
“There is also, of course, a beneficial side. Some of that money may come to India as investments, but we need to balance both the advantages and disadvantages,” he said.
The Fed has kept its benchmark interest rate near zero since December 2008 and has relied on three rounds of large-scale asset purchases to push down borrowing costs and spur growth and employment. The Fed’s record easing has pushed stocks higher, with the Standard & Poor’s 500 Index more than doubling since reaching a 12-year low on March 9, 2009.
The Fed’s easing has helped stabilize the baht, and investments overseas by Thai companies have helped balance capital flows into the country, central bank Governor Prasarn Trairatvorakul said last month. Indonesian Governor Darmin Nasution said the nation’s expanding economy and manageable inflation provide scope for it to attract funds after the move.
Still, Brazilian Finance Minister Guido Mantega, who coined the phrase “currency war” in 2010 when he accused rich nations of trying to competitively devalue their currencies to help exporters, said last month that QE3 will aggravate currency problems for emerging markets.
Brazilian President Dilma Rousseff in March said advanced economies were unleashing a “monetary tsunami” that adversely impacts on emerging nations’ currencies and trade balances.
Colombian Finance Minister Mauricio Cardenas said last month that his country “can’t remain neutral” in the face of the Federal Reserve’s latest round of stimulus, which he said called for lower interest rates in Colombia to curb inflows of capital.