US Federal Reserve officials rebuffed international calls to take the threat of fallout in emerging markets into account when tapering US 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 on Saturday.
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 are not an issue for Fed officials, who said their sole focus is the US economy as they consider when to start reining in US$85 billion of monthly asset purchases that have swelled the central bank’s balance sheet to US$3.65 trillion. Even as the Fed officials advised emerging markets to protect themselves, they were pressed by the IMF 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 US economic policy will affect China’s external environment and domestic economic development, Sheng Laiyun (盛來運), a spokesman for the Chinese National Bureau of Statistics, said yesterday in Beijing.
“Given that US monetary policy has a huge influence on emerging markets and the global economy, we hope that US monetary policy authorities, whether exiting or scaling down stimulus, will not only consider the US’s own economic needs, but also think about economic circumstances in emerging markets,” Sheng said.
With Fed Chairman Ben Bernanke, absent 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.
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 US$60 billion intervention after the real swooned, while Indonesia said it will increase foreign-currency supply. Peru’s central bank sold US$600 million in the local foreign-exchange market on Wednesday last week to support the sol.
Other 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 UK’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 there was still room 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,” he said.
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.”
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 policymakers should pursue regulation rather than coordination to temper the risks posed when investment flows easily into an out of economies.