Bernanke Takes Defense of Monetary Stimulus Abroad, Turns Tables on China
Federal Reserve Chairman Ben S. Bernanke defended his monetary stimulus to fellow central bankers, saying it will aid the world economy, and made some of his strongest criticism of China’s weak-currency policy.
The best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke said in a speech in Frankfurt today. Countries that undervalue their currencies may eventually inhibit growth around the world and risk financial instability at home, he said.
The Fed chief is confronting criticism from officials in countries including China and Brazil who say the Nov. 3 decision to buy $600 billion in Treasury securities has weakened the dollar and contributed to flows of capital to emerging markets. The policy has also come under fire in the U.S., where critics, including Republican members of Congress, have said it risks fueling inflation and asset bubbles.
“Globally, both growth and trade are unbalanced,” Bernanke said. “Because a strong expansion in the emerging- market economies will ultimately depend on a recovery in the more advanced economies, this pattern of two-speed growth might very well be resolved in favor of slow growth for everyone if the recovery in the advanced economies falls short.”
As Bernanke spoke, the Chinese central bank said it will raise the reserve ratio requirement for the nation’s banks by 50 basis points from Nov. 29. The dollar fell to $1.3671 per euro at 9:35 a.m. in New York from $1.3643 yesterday. The Standard & Poor’s 500 Index fell 0.2 percent to 1,194.17.
‘Not so Sure’
Norman Chan, chief executive of the Hong Kong Monetary Authority, the city’s de facto central bank, said he’s “not so sure” if the Fed’s purchases will help spur growth or lower the jobless rate. The “side effect” of the easing for emerging markets is adding risks of asset bubbles in the region, including in Hong Kong, Chan told reporters in the city today.
While Bernanke didn’t identify China in his speech, he took aim at “large, systemically important countries with persistent current-account surpluses.” Bernanke’s comments come a week after leaders of the Group of 20 developed and emerging nations meeting in South Korea failed to agree on a remedy for trade and investment distortions. At the summit, President Barack Obama attacked China’s policy of undervaluing its currency.
“He’s essentially saying, ‘Don’t blame us, you’re part of the problem,’” Robert Eisenbeis, a former Atlanta Fed research director, said on Bloomberg Television’s “InsideTrack.”
Bernanke said the “sense of common purpose has waned” after officials around the world united to fight the financial crisis. “Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems,” he said.
China has tied the yuan to the dollar to promote exports that helped produce the fastest gains in gross domestic product of any major economy. China, which surpassed Japan’s GDP to become world No. 2 in the second quarter, recorded 9.6 percent annual growth in the three months through September. It holds about $2.6 trillion in foreign reserves, the most in the world.
China’s foreign ministry had no immediate comment when asked for a response to Bernanke’s speech. A China central bank spokesman couldn’t immediately be reached for comment.
After the speech, Bernanke spoke during a panel discussion and responded to audience questions, saying that the use of securities purchases for monetary policy affects asset prices “quite significantly.” He said he’s “quite skeptical” of the criticism that central bankers are “pushing on a string.”
At the same time, policy makers “don’t want to overpromise” on a program whose effects are “meaningful” yet “moderate,” he said on the panel with European Central Bank President Jean-Claude Trichet, International Monetary Fund Managing Director Dominique Strauss-Kahn and Brazil’s central bank president Henrique Meirelles.
It’s Bernanke’s first trip abroad since the Federal Open Market Committee made the decision, dubbed QE2 by economists and investors, to implement a second round of so-called quantitative easing. Bernanke said the term is “inappropriate” because it usually refers to policies that change the quantity of bank reserves, “a channel which seems relatively weak, at least in the U.S. context.”
Fed officials are trying to make the case “it was probably a worthwhile gamble for the U.S. to try to print a little bit more money to stimulate the economy without triggering inflation,” former Fed economist David Cohen, now a director of Asia forecasting at Action Economics in Singapore, said in a Bloomberg Television interview.
German Finance Minister Wolfgang Schaeuble said Nov. 5 he was “dumbfounded” at the Fed’s actions, which he said won’t aid growth and will instead contribute to imbalances by driving down the currency. U.S. monetary policy is creating “grave distortions” and causing “collateral effects” on faster- growing economies such as Brazil, Meirelles said in October.
“I don’t think anybody’s going to be all that convinced one way or the other,” said Eisenbeis, now chief monetary economist with Cumberland Advisors Inc. in Sarasota, Florida. “Everybody has their own views, particularly the Germans and the Chinese.”
Bernanke said that different economies “call for different policy settings.” In the U.S., inflation has slowed since the most recent recession began in December 2007, and “further disinflation could hinder the recovery,” he said.
“Insufficiently supportive policies in the advanced economies could undermine the recovery not only in those economies, but for the world as a whole,” he said.
America’s unemployment rate at 9.6 percent last month is currently “high and, given the slow pace of economic growth, likely to remain so for some time,” Bernanke said. He said that “we cannot rule out the possibility that unemployment might rise further in the near term, creating added risks for the recovery.”
The asset purchases will be used in a way that’s “measured and responsive to economic conditions,” Bernanke said. Fed officials are “unwaveringly committed to price stability” and don’t seek inflation higher than the level of “2 percent or a bit less” that most policy makers see as consistent with the Fed’s legislative mandate, he said.
Bernanke, 56, also appealed to human concerns to justify the Fed’s policy.
“On its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” he said. “As a society, we should find that outcome unacceptable.”
The former Princeton University economist devoted the majority of his speech to discussing global policy challenges and tensions.
China’s vice foreign minister, Cui Tiankai, said Nov. 5 “many countries are worried about the impact of the policy,” echoing concern across Asia over the risk of a flood of capital that causes asset bubbles. Economies from Taiwan to Indonesia and Brazil have taken steps to counter inflows of speculative money, and South Korea yesterday said it will back legislation restoring a tax on foreign investment in the nation’s bonds.
Bernanke used one of nine charts to show how countries including China and Taiwan are intervening to prevent or slow appreciation in their currencies. Allowing stronger currencies would help result in “more balanced and sustainable global economic growth,” Bernanke said.
Bernanke, a scholar of the Great Depression, drew a comparison between the current period and events leading to the 1930s economic disaster. The U.S. and France maintained “persistently undervalued” exchange rates by preventing inflows of gold from feeding into money supplies, which created deflationary pressures in other countries and helped bring on the Depression, Bernanke said.
“Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today,” Bernanke said. “In particular, for large, systemically important countries with persistent current-account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.”
To contact the editor responsible for this story: Christopher Wellisz at email@example.com