By Steven K. Beckner
TOKYO (MNI) – 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
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.
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
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
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.”
Howeer, 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
“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.”