Fed Officials Rebuff Coordination Calls as QE Taper LoomsSimon Kennedy, Joshua Zumbrun and Jeff Kearns
Federal Reserve officials rebuffed international calls to take the threat of fallout in emerging markets into account when tapering U.S. monetary stimulus.
The risk that the Fed’s trimming of bond buying will hurt economies from India to Turkey by sparking an exodus of cash and higher borrowing costs was a dominant theme at the annual meeting of central bankers and economists in Jackson Hole, Wyoming, that ended Aug. 24. An index of emerging-market stocks last week fell 2.7 percent, the steepest in two months, compared with a 0.5 percent gain in the Standard & Poor’s 500 Index.
Such selloffs aren’t an issue for Fed officials who said their sole focus is the U.S. economy as they consider when to start reining in $85 billion of monthly asset purchases that have swelled the central bank’s balance sheet to $3.65 trillion. Even as the Fed officials advised emerging markets to protect themselves, they were pressed by the International Monetary Fund and Mexican central banker Agustin Carstens to spell out their intentions better in the interest of safeguarding global growth.
“You have to remember that we are a legal creature of Congress and that we only have a mandate to concern ourselves with the interest of the United States,” Dennis Lockhart, president of the Atlanta Fed, told Bloomberg Television’s Michael McKee. “Other countries simply have to take that as a reality and adjust to us if that’s something important for their economies.”
James Bullard, president of the St. Louis Fed, said in an interview with Bloomberg Radio that the domestic economy is the primary objective of policy. “We’re not going to make policy based on emerging-market volatility alone,” he said.
Any major adjustment in U.S. economic policy will affect China’s external environment and domestic economic development, Sheng Laiyun, a spokesman for the National Bureau of Statistics, said in a press briefing in Beijing today.
“Given that U.S. monetary policy has a huge influence on emerging markets and the global economy, we hope that U.S. monetary policy authorities, whether exiting or scaling down stimulus, will not only consider the U.S.’s own economic needs but also think about economic circumstances in emerging markets,” said Sheng.
Lacking the attendance of Fed Chairman Ben S. Bernanke, the Kansas City Fed’s annual symposium focused on international matters with delegates debating “Global Dimensions of Unconventional Monetary Policy.” The subject was apt because emerging markets have suffered an investor backlash from the Fed’s tapering signals at a time when they are already slowing after powering the world out of recession.
“There’s a lot of angst out there” about the Fed, said Stanford University professor John Taylor, a former U.S. Treasury Department official. “There’s 35 central banks represented at this conference. Many of them are concerned about the impact of the exit on them.”
Fed officials are debating when to begin slowing their bond purchases. At their previous meeting in July, officials said they were “broadly comfortable” with Bernanke’s plan to unwind purchases later this year, according to minutes released Aug. 21. Sixty-five percent of economists in a Bloomberg Aug. 9-13 survey said the first cut would come at the Sept. 17-18 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,” San Francisco Fed President John Williams said in an interview with Bloomberg Television.
Emerging-market stocks have lost more than $1 trillion since May, according to data compiled by Bloomberg. That’s the month when Bernanke said the Fed “could take a step down” in its bond purchases. The MSCI Emerging Markets Index has fallen about 12 percent this year, compared with a 13 percent gain in the MSCI gauge of shares in advanced countries.
The MSCI Emerging Markets Index was up 0.4 percent to 936.64 at 11:40 a.m. in Frankfurt today after a 1.1 percent gain on Aug. 23. The MSCI Asia Pacific Index advanced 0.1 percent to 131.54.
With the 20 most-traded currencies among emerging nations sliding about 4 percent in the past three months, policy makers from these countries are acting to insulate their economies. Brazil last week announced a $60 billion intervention after the real swooned, while Indonesia said it will increase foreign-currency supply. Peru’s central bank sold $600 million in the local foreign-exchange market on Aug. 21 to support the sol.
The market palpitations drew warnings in Jackson Hole that the worst may still be ahead.
“It could get very ugly” in emerging economies as the probability of currency and banking crises grows, said Carmen Reinhart, the co-author of “This Time is Different: Eight Centuries of Financial Folly” and a professor at Harvard University. “Whenever emerging markets have faced rising international interest rates and softening commodity prices, let us not forget that it has not boded well.”
Amid such concerns, IMF Managing Director Christine Lagarde warned that financial market reverberations “may well feed back to where they began.” She proposed “further lines of defense” such as currency swap lines.
“We advocate clarity, proper and well-channeled communications,” Lagarde told Bloomberg Television’s Sara Eisen in an Aug. 23 interview. “The signaling effect matters almost more than the implementation. The signal has to be very clear.”
Her call was echoed by Carstens, who urged the Fed to be more open about its strategy. “What would have the most impact right now would be to have a much better, clearer implementation of the tapering,” he said.
Adapting to advanced countries’ exit strategies is “the most pressing challenge for emerging economies,” Carstens said, noting the “turbulence in financial markets around the world once the tapering talk started.”
“It would be desirable to have monetary policy coordination,” he said. “To have the central banks of advanced economies to go in different directions, can become a source of instability.”
Central banks of the world’s biggest economies are at various stages of policies aimed at underpinning demand.
Bank of Japan Governor Haruhiko Kuroda said his asset buying has “started to exert effects” on the economy, while Bank of England Deputy Governor Charlie Bean said the U.K.’s pledge to keep rates on hold until unemployment reaches 7 percent should boost confidence.
European Central Bank officials Ewald Nowotny and Panicos Demetriades split over whether renewed growth in the euro area meant room was still open for lower rates there.
Bean pushed back against the idea of taking into account foreign effects when setting policy.
“While I can accept the logic of this, I am afraid I do not think we know nearly enough about the magnitude -- or even sign -- of these spillovers to make this a viable option,” Bean told the conference. “The best we can probably aspire to is directing monetary policies to achieving domestic price stability in a sensible manner and seeking to communicate our policy intentions as clearly as possible.”
Former Bank of Israel Governor Stanley Fischer said emerging markets may ultimately welcome the pivot away from excess liquidity. “Dealing with those inflows of capital is a real problem because it can cause the exchange rate to appreciate,” he said. “A lot of countries, after a period of transition, will be very happy with the shift” to more normal capital flows.
A similar point was made by Luiz Awazu Pereira, the deputy governor of Brazil’s central bank, who said less Fed stimulus would be positive for countries such as his because it would signal the world’s largest economy is in recovery.
Academic papers presented at the event put the onus on emerging markets to insulate themselves. Helene Rey, a professor of economics at London Business School, said emerging markets should use tools such as stress tests and leverage ratios to smooth disruptions caused by capital flows rather than blame larger countries. Former Bank of France Deputy Governor Jean-Pierre Landau said policy makers should pursue regulation rather than coordination to temper the risks posed when investment flows easily into an out of economies.
That debate about the withdrawal of stimulus marks a turnaround from the past four years when emerging markets fretted the U.S.’s monetary easing was forcing yield-seeking capital to overheat their economies as $3.9 trillion entered them. Bernanke has said he’s unconvinced by the argument and contends a stronger U.S. was in the best interest of the world.
“They were complaining about us easing too much,” Bullard said. “Now when we start to talk about taper they’re complaining about too tight of a policy. They have an independent monetary policy and they have to use that to manage” their own economies.