Trans-Pacific Currency Deal Puts Yellen's Fed in the Spotlight

Emerging markets seek consultations on Fed's next move

Photographer: Andrew Harrer/Bloomberg

As part of the Trans-Pacific Partnership deal, emerging markets want to know what Federal Reserve Chair Janet Yellen is thinking.

As a sidebar to the largest trade pact in two decades, the U.S. and 11 other Pacific Rim countries agreed not to manipulate foreign-exchange rates and to consult on monetary policies.

Economies like Vietnam and Malaysia, which rely heavily on exports, promised not to devalue their currencies in order to gain a competitive advantage. In exchange, they want to get more insights into U.S. monetary policy.

An interest rate hike, the first in almost a decade, will probably prompt capital to flee developing nations, causing their currencies to slump.

History shows those concerns are justified. Back in 2013, when then-Fed Chairman Ben Bernanke suggested the central bank would soon wind down its bond-buying program, currencies from India’s rupee to Turkey’s lira plunged. His successor, Yellen, has been hinting for a while that a rate rise in on the cards while the timing remains elusive.

World Bank: Global Economic Prospects 2015
World Bank: Global Economic Prospects 2015

“Part of the deal is that they get to ask more intrusive questions about what the Federal Reserve is doing,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, referring to the other nations in the TPP. “From the viewpoint of these countries, the longer the Fed stays at zero, the better.”

During the negotiations, some of the smaller economies highlighted the far-reaching impact monetary policies in larger developed countries — read the U.S. — have on them, according to a person familiar with the negotiations, who asked not to be named because the details of the talks aren't public.

Participants have agreed  that consultations will take place among senior-government officials, although the precise framework has yet to be determined, the person said. And of course, such talks don't mean the U.S. central bank will need to follow other countries' wishes. 

``Questions about Fed policy will be filtered through the Treasury, and in no way will the Fed be committed or compromised.'' said Hufbauer.

Both the World Bank and the International Monetary Fund have urged the Fed to hold off raising rates until next year, citing the risks to poorer developing countries.

The currency pledge carries weight given that it brought together a cross-section of countries producing 40 percent of the world’s global economy output.

In addition to the U.S., they are: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. And this is how they trade with the world's biggest economy.

One noteworthy country absent from the negotiations was China, the primary target of criticism that it manages the yuan unfairly. The side agreement sends the world's second-biggest economy a message.

"It is a way of showing China that if it wants to join, and it expressed some interest in joining the TPP, it has to abide by whatever the disciplines are that are outlined in the deal," said Caitlin Webber, a Bloomberg Intelligence analyst in Washington. 

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