Latin America to Canada Bet on Good-Neighbor Policy From Fed

Jose Dario Uribe, governor of Colombia's central bank, Banco de la Republica de Colombia, speaks at the Bloomberg Americas Monetary Summit in New York, on April 20.

Photographer: Michael Nagle/Bloomberg

Central bankers from Canada to Colombia are betting the U.S. Federal Reserve will prove a good neighbor to their economies and financial markets when it raises interest rates for the first time since 2006.

Greater transparency about the Fed’s plans from Chair Janet Yellen and the assumption any U.S. rate increase would reflect a welcome strengthening of their key trading partner were cited as reasons for confidence by policy makers at the Bloomberg Americas Monetary Summit in New York.

“The Fed has been doing a very good job and they are trying to be as transparent as possible and trying to make as little noise as possible,” Colombia central bank Governor Jose Dario Uribe said at the Monday conference. “We don’t expect, for example, big movements in the exchange rate and bond rates.”

Investors will hope such upbeat takes prove justified two years since the Fed roiled international markets when it signaled an intention to slow bond buying. Tighter U.S. policy has historically created turbulence in Latin America, helping fuel the region’s debt crises of the 1980s as well as in Mexico and Brazil in the subsequent decade.

Such economies could do without a fresh bout of financial stress after commodity prices tumbled and the International Monetary Fund cut its forecasts for economic growth this year and next in both Latin America and Canada. The prediction of 0.9 percent for Latin America would be the lowest since 2009.

U.S. Strength

Brazil’s real has been the worst performer after the Russian ruble among 31 major currencies the past year, tumbling about 26 percent against the dollar. Colombia’s peso has lost 22 percent and the Mexican peso 15 percent over the same period.

By contrast, the U.S. economy may be gaining strength after a first-quarter flutter, leaving 71 percent of economists in the latest Bloomberg survey expecting the Fed to start raising rates from near zero in September. Yellen has sought to soften the blow beforehand by saying borrowing costs will probably be raised only gradually.

“The market has already taken into account the possibility of a Federal Reserve rate increase,” Peru central bank President Julio Velarde said.

Bank of Canada Governor Stephen Poloz said the U.S. economy poses an “upside risk” to his outlook and may turn out stronger than economists are expecting. That would be positive for his economy, which sends about three-quarters of its exports south of the border.

Canada Spillover

“Whenever liftoff happens it’ll be in a context that’s helpful for us,” Poloz said. “That has a pretty natural spillover to Canada.”

As for Chile, Governor Rodrigo Vergara said monetary policy in his economy had often proven to be “quite independent” from the U.S. and his biggest international concern is about a slowdown in China, which buys much of the country’s copper. He too said if the Fed acts because its economy is improving that it would be a positive signal.

“Getting back to normal is a good thing,” said Vergara, who added that he’s more focused on long-term U.S. rates than any short-term changes. “If things are getting back to normal, the reason for that is the U.S. economy is doing fine.”

Brazilian Finance Minister Joaquim Levy said his central bank needs to stay focused on inflation, which he said had shown some signs of slowing after accelerating in the first quarter as electricity prices climbed. Brazil is one of the few central banks in the world to raise interest rates this year, lifting its benchmark to 12.75 percent in March.

Inflation Fight

“You have to continue to be vigilant that inflation continues to come down,” said Levy.

Policy makers were less calm in 2013 after emerging markets were roiled by speculation the Fed would wind down its unprecedented stimulus program, an episode known as the “taper tantrum.”

In the aftermath of that, Mexico central bank Governor Agustin Carstens was among those critical of the Fed, complaining that the Fed needed to pursue “much better, clearer” communications.

“Certainly we’re better prepared and certainly I think that the Fed has without a doubt bent over backwards to provide better information,” Carstens said in an interview Sunday in Washington.

Still, he said there is a limit to the additional information because the Fed “cannot communicate what they don’t know” and “that’s precisely what’s generating volatility.”

Fed Comments

The message of don’t fear the Fed was underscored by Federal Reserve Bank of New York President William Dudley, who told the conference that emerging markets are “better equipped today to handle the challenge than they were in the past.”

“While tightening cycles by the Fed can pose challenges for emerging market economies, these need not be disruptive,” Dudley said. “The combination of stronger U.S. growth, improved emerging-market economy fundamentals and effective Fed communications can limit the stresses caused by the onset of tightening.”

Developing nations have taken steps to put their economies on a stronger footing, he said. Fewer currencies are tied to the dollar, debt loads are lower and foreign exchange reserves are bigger. Central banks have also tamed inflation, governments have improved fiscal discipline and banking systems are better capitalized, he added.

Dudley also cited IMF research that showed higher U.S. interest rates are typically associated with stronger U.S. growth and so tend to be a boost for emerging markets.

“The likely explanation for this favorable record is that Fed tightening generally occurs during periods of strong U.S. economic performance,” Dudley said. “We seek to be good global stewards.”

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