Global finance leaders stepped up calls on Saturday for the US Federal Reserve to take care in moving to cut its stimulus, as emerging countries wrestle with financial turbulence.
Numerous countries at the annual meeting of the IMF and the World Bank said the US central bank’s expected tightening had already added challenges to their struggling economies, stirring capital outflows and pressing their currencies lower.
The IMF’s steering committee, the International Monetary and Financial Committee (IMFC), itself cautioned the Fed and other central banks in advanced economies when they begin “normalizing” their ultra-low interest rates and easy-money policies.
“The eventual transition toward the normalization of monetary policy ... should be well-timed, carefully calibrated and clearly communicated,” the IMFC said.
Others were more frank, after struggling with the consequences of a surge in interest rates in the five months since the Fed signaled it was close to “tapering” its US$85 billion a month asset-purchase program.
Africa’s IMF and World Bank representatives said they were “worried about uncertainty” arising from the pullback from so-called unconventional monetary policies — which have flooded cheap US dollars, euros and yen onto the global economy for about five years.
Russian Minister of Finance Anton Siluanov said he expects only more turmoil in the markets when the Fed moves.
“The assumption that the asset-price correction that began this summer has already been largely completed does not seem to be plausible to us,” he told the IMFC. “Even the first hint on the exit from unconventional monetary policies in advanced economies has already led to many difficulties for emerging-market economies.”
Central Bank of Brazil Governor Alexandre Tombini said that economic pessimism had spread due to the expected Fed tightening.
People’s Bank of China Deputy Governor Yi Gang (易綱) warned against a “disorderly” wind-down of stimulus programs.
“While unconventional monetary policies helped stabilize growth and financial markets in advanced economies after major crises, more attention should be given to the risks associated with the prolonged use and disorderly exit of such policies,” he said. “Policy coordination and clear and effective communications will be essential to ensure the smooth and orderly exit of unconventional monetary policies.”
The Fed still has not begun its taper, deciding so far that the US economy is not ready for it, but most expect the stimulus reductions to come in the next few months.
Fed Chairman Ben Bernanke has reaped criticism for allegedly poorly communicating his intent.
National Bank of Austria Governor Ewald Novotny, a member of the European Central Bank’s governing council, called on the Fed to communicate better the direction of its monetary policy to minimize the impact of the taper.
Speaking as representative of Austria, Turkey and six Eastern European countries at the IMF, he called on the Fed to “engage in international dialogue in order to minimize unwarranted negative spillovers from the exit of its unconventional monetary policy measures on other countries.”
Still, the IMF has repeatedly warned the emerging economies to fortify themselves against likely more turbulence and higher interest rates as the global economy transitions to a more “normal” monetary situation.
World Bank president Jim Yong Kim said that the Fed’s decision not to begin the taper last month effectively bought other countries extra time to get their houses in order.
“The decision not to decrease bond purchases by the US Fed is giving emerging markets at least a couple of months’ window,” he said. “The advice is very clear. We are very strongly urging these emerging market economies to move quickly on these reforms that we all know they have to make.”
Tombini said that is what his country has done, piling up foreign reserves and other strong buffers.However, he warned that if the Fed and others moved too fast, it could easily overshoot and depress global growth.
“If long-term real interest rates rise too steeply, the US recovery could stumble and the negative effects would be felt worldwide,” he said.