Federal Reserve Bank of San Francisco President John Williams, who has never dissented from a policy decision, said clear communication will be needed as policy makers try to wind down stimulus in the U.S.
The Fed must “communicate very effectively with other central banks around the world what our plans are so that there’s a good understanding of how policy in the U.S. is likely to proceed,” Williams, who doesn’t hold a vote on policy this year, said today on a panel in Gothenburg, Sweden. “That will help avoid at least somewhat the risks of big market turmoil.”
William’s comments echoed those by International Monetary Fund Managing Director Christine Lagarde and Bank of Mexico Governor Agustin Carstens last week at the annual Fed conference in Jackson Hole, Wyoming, where they said U.S. policy makers should spell out their intentions better to safeguard global economic growth and reduce market volatility.
Emerging-market stocks worldwide have lost $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 of companies in 21 developing nations tumbled 2.7 percent last week for the steepest retreat in two months. Turkey’s lira and India’s rupee weakened to records today against the dollar.
“There’s no question that there are a lot of challenges ahead in executing the normalization,” Williams said today. “The experience of the last few months with the bumpy path of interest rates and flows across the globe can show that this may not always be an easy process.”
Other Fed presidents speaking at Jackson Hole rebuffed international calls to take the threat of fallout in emerging markets into account when tapering U.S. monetary stimulus.
The Fed is a “legal creature of Congress” with a mandate to concern itself only with the U.S. interest, Atlanta’s Dennis Lockhart told Bloomberg Television at the conference last week.
James Bullard, president of the St. Louis regional Fed bank, said in a Bloomberg Radio interview that the domestic economy is the Fed’s primary policy objective and that the central bank won’t “make policy based on emerging-market volatility alone,” he said. Bullard votes on policy this year while Lockhart doesn’t until 2015.
The iShares MSCI Emerging Markets Index exchange-traded fund, which tracks 820 companies from Malaysia to Poland to Brazil, has slumped 16 percent this year while the Standard & Poor’s 500 Index has advanced 15 percent. The Chicago Board Options Exchange Emerging Markets Volatility Index, a measure of options prices on the ETF and expectations of price swings, jumped to a seven-week intraday high of 28.05 today.
Williams repeated that the decisions to slow and end quantitative easing will depend on how data show the world’s largest economy progressing, and that the Fed must “focus on our goals of getting the economy back to maximum employment, keeping inflation near 2 percent,” he said today.
The yield on the benchmark 10-year Treasury note hit a two-year high of 2.93 percent last week on speculation the Federal Open Market Committee will soon begin tapering $85 billion in monthly bond buying. Policy makers, scheduled to meet Sept. 17-18, have pledged to keep buying securities until the job market improves substantially.
Minutes of the FOMC’s July 30-31 meeting released last week show policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to reduce purchases this year if the economy strengthens, with a few saying a reduction may be needed soon.
Williams spoke at the University of Gothenburg at an annual gathering of the European Economic Association and the Econometric Society. European Central Bank Executive Board member Benoit Coeure and Lars Svensson, a former deputy governor at Sweden’s Riksbank, also spoke on the panel, titled “Challenges For Monetary Policy: Views From The Trenches.”
Williams said last week he is keeping an “open mind” about whether the central bank should reduce the pace of asset purchases at next month’s meeting.
“If the data continue to progress as we’ve seen, then I do agree that we should edge down or taper our purchases later this year,” Williams said in a Bloomberg Television interview Aug. 23 at the Fed meeting of central bankers and economists.
Payroll growth during the past six months has averaged 200,000, compared with a 141,000 average in the six months before September, when the FOMC announced a third round of bond buying. Also, jobless claims fell to 320,000 in the week ended Aug. 10, the least since October 2007.
The U.S. economy grew at a 1.7 percent annualized rate in the second quarter after a 1.1 percent gain the prior three months, Commerce Department data show. That’s below the 2.2 percent average since the recession ended June 2009.
U.S. economic growth will probably speed up in the second half of 2013, climbing 2.3 percent this quarter and 2.6 percent in the fourth quarter, according to the median estimate in a Bloomberg survey of economists from Aug. 2 until Aug. 6.
The yield on the 10-year Treasury note fell today six basis points, or 0.06 percentage point, to 2.73 percent at 1:14 p.m. in New York, according to Bloomberg Bond Trader prices.
Williams, 51, has worked in the Fed system since 1994. He was the reserve bank’s research director before succeeding Janet Yellen as president in 2011, when she became the board’s vice chairman.