TOKYO - An often heard complaint at the annual meetings of the International Monetary Fund and World Bank in recent days was that the aggressive and unconventional monetary easing of the Federal Reserve and other major central banks is hurting emerging market nations, but Federal Reserve Chairman Ben Bernanke was having none of it Sunday.
Indeed, Bernanke sought to turn the tables on those nations, countering that their own rigid exchange rate policies are the source of their problems.
Besides, he contended, the Fed's monetary stimulus provides a net benefit, not only to the U.S. economy, but to the whole world, including its less advanced regions.
For the second time in two weeks, Bernanke also defended the Fed's two-pronged monetary easing campaign as needed to strengthen the U.S. economy.
Its "flexible" and "open-ended" large-scale asset purchases should boost public confidence in the Fed's willingness to keep pumping money into the economy until the recovery strengthens, ease financial conditions and spur faster growth, he maintained in a speech at the Bank of Japan.
The Fed chief said the costs and risks of unconventional easing present a "high hurdle," even though the Fed's policymaking Federal Open Market Committee overwhelmingly approved its latest aggressive stimulus measures on Sept. 13.
To lower long-term interest rates, the FOMC announced then that it would buy $40 billion per month of mortgage backed securities while continuing through year-end its $45 billion monthly Treasury security purchases under "Operation Twist." It said it would keep buying assets indefinitely until the labor market improves "substantially" and left the door open to changing the composition or size of its purchases.
The FOMC simultaneously resorted to verbal easing of short-term rates, saying it was likely to keep the federal funds rate near zero until at least-mid 2015, and further stating it "expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."
The European Central Bank, the Bank of Japan and the Bank of England have also launched or have said they stand ready to do quantitative easing as well.
Brazilian Finance Minister Guido Mantega was the most prominent emerging market policymaker to object to such measures at the annual meetings, alleging that their chief aim is to boost growth in the U.S. and other industrial countries by depreciating their currencies to gain an unfair trade advantage.
Brazil is one of the nations which has engaged in foreign exchange intervention to resist upward pressure on its currency.
"If the domestic transmission mechanisms are weak, monetary policy will operate mainly through its effects on exchange rate depreciation and the resulting increase in net exports," said Mantega, adding that "advanced countries cannot count on exporting their way out of the crisis at the expense of emerging market economies."
"'Currency wars' will only compound the world's economic difficulties," he went on. "Trying to grasp larger shares of global demand through artificial means has many side effects. It is a selfish policy that weakens the efforts for concerted action."
Mantega served notice that Brazil and other emerging market countries "cannot passively endure the spillovers of advanced countries' policies through large and volatile capital flows and currency movements. All forms of trade and currency manipulation must be avoided because they improve international competitiveness in a spurious manner."
Mantega vowed that his own country "will take whatever measures it deems necessary to avoid the detrimental effects of these spillovers" and rejected complaints from its trading partners about its defensive actions in foreign exchange markets.
"We cannot accept the attempt to unfairly label as 'protectionist' legitimate measures of defense in the areas of foreign trade, exchange rate and capital account management," he said. "Experience has shown that the free flow of capital is not necessarily the preferable option in all circumstances."
Bernanke, who has been participating in the annual meetings of the International Monetary Fund and World Bank with Treasury Secretary Timothy Geithner in recent days, confronted the charges of Mantega and others head on and mounted a thoroughgoing defense of Fed policies.
"Although the monetary accommodation we are providing is playing a critical role in supporting the U.S. economy, concerns have been raised about the spillover effects of our policies on our trading partners," he said. "In particular, some critics have argued that the Fed's asset purchases, and accommodative monetary policy more generally, encourage capital flows to emerging market economies."
"These capital flows are said to cause undesirable currency appreciation, too much liquidity leading to asset bubbles or inflation, or economic disruptions as capital inflows quickly give way to outflows," he said.
Bernanke said he is "sympathetic to the challenges faced by many economies in a world of volatile international capital flows." And he acknowledged that "highly accommodative monetary policies in the United States, as well as in other advanced economies, shift interest rate differentials in favor of emerging markets and thus probably contribute to private capital flows to these markets."
However, he said "it is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies." He gave several reasons.
"First, the linkage between advanced-economy monetary policies and international capital flows is looser than is sometimes asserted. Even in normal times, differences in growth prospects among countries -- and the resulting differences in expected returns -- are the most important determinant of capital flows."
"The rebound in emerging market economies from the global financial crisis, even as the advanced economies remained weak, provided still greater encouragement to these flows," he continued. "Another important determinant of capital flows is the appetite for risk by global investors."
"Over the past few years, swings in investor sentiment between 'risk-on' and 'risk-off,' often in response to developments in Europe, have led to corresponding swings in capital flows."
Bernanke said research by the IMF and others "does not support the view that advanced-economy monetary policies are the dominant factor behind emerging market capital flows." In fact, he said, "these flows have diminished in the past couple of years or so, even as monetary policies in advanced economies have continued to ease and longer-term interest rates in those economies have continued to decline."
"Second, the effects of capital inflows, whatever their cause, on emerging market economies are not predetermined, but instead depend greatly on the choices made by policymakers in those economies."
"In some emerging markets, policymakers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth," he said. "However, the perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation."
"In other words, the perceived advantages of undervaluation and the problem of unwanted capital inflows must be understood as a package," Bernanke said. "You can't have one without the other."
Bernanke suggested "an alternative strategy," which would be "to refrain from intervening in foreign exchange markets, thereby allowing the currency to rise and helping insulate the financial system from external pressures."
"Under a flexible exchange-rate regime, a fully independent monetary policy, together with fiscal policy as needed, would be available to help counteract any adverse effects of currency appreciation on growth," he said. "The resultant rebalancing from external to domestic demand would not only preserve near-term growth in the emerging market economies while supporting recovery in the advanced economies, it would redound to everyone's benefit in the long run by putting the global economy on a more stable and sustainable path."
Third, "any costs for emerging market economies of monetary easing in advanced economies should be set against the very real benefits of those policies."
"The slowing of growth in the emerging market economies this year in large part reflects their decelerating exports to the United States, Europe, and other advanced economies," Bernanke said. "Therefore, monetary easing that supports the recovery in the advanced economies should stimulate trade and boost growth in emerging market economies as well."
Bernanke said that "in principle, depreciation of the dollar and other advanced-economy currencies could reduce (although not eliminate) the positive effect on trade and growth in emerging markets."
But he added that "since mid-2008, in fact, before the intensification of the financial crisis triggered wide swings in the dollar, the real multilateral value of the dollar has changed little, and it has fallen just a bit against the currencies of the emerging market economies."
Whatever its impact on other countries, Bernanke maintained the Fed's latest easing measures should help the U.S. economy.
"The open-ended nature of these new asset purchases, together with their explicit conditioning on improvements in labor market conditions, will provide the Committee with flexibility in responding to economic developments and instill greater public confidence that the Federal Reserve will take the actions necessary to foster a stronger economic recovery in a context of price stability," he said.
"An easing in financial conditions and greater public confidence should help promote more rapid economic growth and faster job gains over coming quarters," he added.
As he has said before, Bernanke conceded "monetary policy is not a panacea." But he said "we expect our policies to provide meaningful help to the economy."
Bernanke said he and his FOMC colleagues "recognize that unconventional monetary policies come with possible risks and costs; accordingly, the Federal Reserve has generally employed a high hurdle for using these tools and carefully weighs the costs and benefits of any proposed policy action."
Bernanke defended the FOMC actions on the grounds that the data were "continuing to signal weak labor markets and no signs of significant inflation pressures."
He said "the U.S. economy has faced significant headwinds, and, although the economy has been expanding since mid-2009, the pace of our recovery has been frustratingly slow."
"In this environment, households and businesses have been quite cautious in increasing spending," he said. "Accordingly, the pace of economic growth has been insufficient to support significant improvement in the job market; indeed, the unemployment rate, at 7.8%, is well above what we judge to be its long-run normal level. With large and persistent margins of resource slack, U.S. inflation has generally been subdued despite periodic fluctuations in commodity prices."
While the Fed is falling short on the "maximum employment" part of its dual mandate, he said "consumer price inflation is running somewhat below the Federal Reserve's 2% longer-run objective, and survey- and market-based measures of longer-term inflation expectations have remained well anchored."
What's more, he said, the FOMC judged that "there were significant downside risks to this outlook, importantly including the potential for an intensification of strains in Europe and an associated slowing in global growth."
Given all those factors, the FOMC decided more stimulus was warranted, Bernanke said.
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