Pedro da Costa and Alister Bull Jackson Hole, Wyoming
Global financial stability was at risk as central banks drew back from ultra-easy policies that had flooded the world with cash, because emerging markets lacked defences to prevent potentially huge capital outflows, top officials were warned on Saturday.
Central bankers from around the world, devoting the second day of their annual Jackson Hole policy retreat to the threats posed by global liquidity, heard two academic papers on the challenges, sparking a debate on actions and on co-ordination.
Bank of Japan governor Haruhiko Kuroda told the audience, which included top officials from advanced and emerging economies, that the bold measures he had championed to spur his nation’s moribund economy were bearing fruit.
“The bank’s [policy] has already started to exert its intended effects,” Kuroda said. The Bank of Japan has embarked on an aggressive bond-buying campaign to lift inflation in his country to 2 percent.
Easy money policies used to depress interest rates in Japan, Europe and the US sparked a flood of capital into emerging markets as investors sought higher returns. Now, however, the US Federal Reserve has said it plans to reduce its bond-buying stimulus by year end, with an eye on drawing it to a close by mid-2014.
That has sparked an exodus of cash from emerging markets, including India and Brazil, whose currencies and stock markets suffered steep losses last week.
“Amplifications, feedback loops and sensitivity to risk perceptions will complicate the task of exit and necessitate very close and constant dialogue and co-operation between central banks,” Jean-Pierre Landau, a former deputy governor of the Bank of France, warned.
Luiz Pereira, deputy governor of the Brazilian central bank, argued that a tapering of the Fed’s bond purchases might actually be a net benefit for emerging economies if it signaled that the US economy was picking up steam. A stronger US should spell stronger demand for exports from emerging economies.
Landau argued that central banks in advanced economies had co-operated successfully during the 2007-2009 financial crisis, and they could do so again with an eye towards moderating the spillovers from their actions.
But, he acknowledged it would be difficult to get agreement to subordinate national priorities in advance, a point echoed by others.
“How much should domestic monetary policy restrain itself for the stability of global (conditions)?” asked Allan Meltzer, a Fed historian and professor at Carnegie Mellon University. “That’s a fundamental problem for monetary policy.”
There was also discussion about the need for emerging market nations to develop tools to control credit flows. Without such tools, these countries could lose the ability to control domestic financial conditions with monetary policy.
Don Kohn, a former US Federal Reserve vice-chairman and a candidate for the top job when chairman Ben Bernanke’s term ends in January, countered the claim that monetary policy might be too loose globally, citing elevated jobless rates in rich countries. – Reuters