Bernanke Says Easing by Advanced Nations Helps World Economy
Federal Reserve Chairman Ben S. Bernanke said low interest rates in advanced nations benefit the world economy while not creating a disruptive diversion of trade through weaker currencies.
“The benefits of monetary accommodation in the advanced economies are not created in any significant way by changes in exchange rates,” Bernanke said today at the London School of Economics. “They come instead from the support for domestic aggregate demand in each country or region,” he said, speaking on a panel with Bank of England Governor Mervyn King.
While the U.S. economy is completing its fourth year of expansion, inflation persists below the Fed’s 2 percent target and growth hasn’t been strong enough to achieve the significant reduction in unemployment that Bernanke says is needed before he begins to withdraw stimulus.
The unemployment rate last month stood at 7.7 percent, and the personal consumption expenditures price index rose just 1.2 percent in January. New York Fed President William Dudley said today in a speech in New York that he sees the U.S. labor market improving slowing, warranting a continuation of “very accommodative” policy. U.S. central bankers cut the benchmark lending rate to zero in December 2008.
The Fed’s “artificially low” main interest rate has put upward pressure on several currencies, threatening to erode the competitiveness of those nations’ economies, Mohamed El-Erian, Pacific Investment Management Co.’s chief executive officer, said on March 15.
“Ultimately, they are forced -- Mexico has been forced, Brazil has been forced, Korea has been forced, Japan has been forced -- into doing exactly the same thing” as the Fed, El- Erian said during his speech in Stanford, California.
Bernanke said the distinction between policies aimed at reviving growth versus those aimed at trade diversion, exchange rate devaluations “or other protectionist measures is critical.”
The Fed chairman said emerging markets may be understandably wary of monetary easing in advanced economies because an appreciation of their own currencies may undermine an export-led growth strategy. Also, their smaller financial systems may be vulnerable to inflows of capital seeking higher interest rates, producing asset price bubbles.
Still, the trade-weighted real exchange rates of emerging market economies, “with some exceptions,” haven’t changed much since the financial crisis in late 2008, Bernanke said.
“Even if the expansionary policies of the advanced economies were to lead to significant currency appreciation in emerging markets, the resulting drag on their competitiveness would have to be balanced against the positive effects of stronger advanced-economy demand,” he said.
Stocks slid, erasing early gains, amid concern that Cyprus’s bank-restructuring plan will pave the way for losses on deposits in other European nations.
The Standard & Poor’s 500 Index fell 0.3 percent to 1,552.61 at 2:35 p.m., after climbing as high as 1,564.91, within one point of its 2007 record close. The yield on the 10- year Treasury note declined one basis point, or 0.01 percentage point, to 1.92 percent.
Mexico’s central bank unexpectedly cut its benchmark interest rate this month for the first time since 2009, while Haruhiko Kuroda, the new Bank of Japan (8301) governor, has pledged to do more to beat deflation.
“The advanced industrial economies are currently pursuing appropriately expansionary policies to help support recovery and price stability in their own countries,” Bernanke said in his prepared remarks. “These policies confer net benefits on the world economy as a whole and should not be confused with zero-or negative-sum policies of trade diversion.”
Bernanke also said he was “skeptical” that interest rate differentials were the “dominant force” behind capital inflows into emerging economies. Differences in growth prospects and swings in investor risk sentiment “seem to have played a larger role.”
“The fact that some emerging market economies have policies that depress the values of their currencies may create an expectation of future appreciation that in and of itself induces speculative inflows,” he said.
Bernanke and his policy making colleagues last week decided to press on with purchases of long-term debt that have ballooned the Fed’s balance sheet to a record $3.21 trillion.
At a March 20 press conference, Bernanke provided a clearer road map than ever before on what’s needed before the Fed trims its purchases, while avoiding any hint that a cut in $85 billion in monthly bond buying is imminent. The central bank will adjust buying in a “sensitive way” based on several measures, including payrolls, wages and jobless claims, he said.
In a statement before Bernanke’s press conference, the Federal Open Market Committee reiterated its plan to leave its key interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation is less than 2.5 percent.
The FOMC said it plans each month to continue buying $40 billion of mortgage-backed securities and $45 billion of Treasury securities.
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