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.

[TOPICS: M$U$$$,MFU$$$,MGU$$$,M$$CR$,MT$$$$,MMUFE$,M$$BR$]