Dudley Says Fed Must Be Mindful of Emerging-Market Impact

Federal Reserve officials should keep global financial stability concerns in mind as they aim at domestic policy goals, even though emerging markets have become better equipped to handle financial volatility, said New York Fed President William Dudley.

“Given the role of the dollar as the global reserve currency, the Federal Reserve has a special responsibility to manage policy in a way that helps promote global financial stability,” Dudley said today in remarks released by the New York Fed from a meeting that was closed to the press.

Dudley, who has a permanent vote on the rate-setting Federal Open Market Committee, said central banks, including the Fed, could “be better global stewards” by making sure they communicate effectively about their policies and by stemming credit excesses.

“The fundamental issue is whether U.S. monetary policy has helped support our dual objectives of stable prices and maximum sustainable growth and whether this is consistent with a healthy global economy,” Dudley said.

The MSCI Emerging Markets Index has declined as much as 16 percent since May 22, when the Fed signaled its asset-buying program could be trimmed if the economy showed improvement.

Capital Retreat

Markets from Brazil to India to Colombia suffered a capital retreat as yields on U.S. 10-year notes rose to 2.49 percent at the end of June from 1.92 percent on May 21, the day before former Chairman Ben S. Bernanke told the Joint Economic Committee of Congress that the Fed could “take a step down” in the pace of purchases if economic growth appeared sustainable.

Emerging-market economies have lowered external debt levels, improved fiscal discipline and strengthened their banking systems, all of which make them more resilient to Fed tightening cycles, Dudley said.

“More work remains to strengthen institutional structures further in some countries,” Dudley said. He added that vulnerabilities have “built up” in several emerging-market economies, even though many are in a better position to “weather those times in the cycle when the external environment turns from welcoming to wary.”

Dudley shunned calls for closer international monetary-policy coordination, saying “it would be taking on too much to attempt to collectively fashion policy in reference to global conditions.”

“Monetary policy meant to suit everybody is likely in the end to suit nobody,” Dudley said.

The New York Fed president also called for “a better international mechanism” to cushion the blows of abrupt changes in capital flows.

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