US Federal Reserve rebuffs calls to account for QE tapering fallout
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 August 24. An index of emerging-market stocks last week fell 2.7 %, the steepest in two months, compared with a 0.5% gain in the Standard & Poor's 500 Index.
Such sell-offs aren't an issue for Fed officials who said their sole focus is the US 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 US," Dennis Lockhart, president of the Atlanta Fed said. "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 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, a spokesman for the National Bureau of Statistics, said on Monday.
"Given that the US monetary policy has a huge influence on emerging markets and the global economy, we hope that the 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 situation 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 US 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 August 21. Sixtyfive per cent of economists in a Bloomberg August 9-13 survey said the first cut would come at the September 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 % this year, compared with a 13 % gain in the MSCI gauge of shares in advanced countries.
The MSCI Emerging Markets Index was up 0.4 % to 936.64 at 11:40am in Frankfurt today after a 1.1 % gain on August 23. The MSCI Asia Pacific Index advanced 0.1 % to 131.54. With the 20 most-traded currencies among emerging nations sliding about 4 % in the past three months, policymakers 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 August 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 defence" such as currency swap lines. "We advocate clarity and well-channelled communications," Lagarde told Bloomberg Televisionin an August 23 interview.