Fed chief rounds on stimulus critics

Ben Bernanke has been defending the US central bank's aggressive monetary policy from attacks by officials all over the world. These officials have accused Bernanke of sparking a global "currency war," risking the destablishment of emerging market economies.

By Claire Jones and Ben McLannahan
Last updated: October 14, 2012 5:03 pm
Financial Times

Ben Bernanke has launched a staunch defence of the US central bank’s aggressive monetary easing amid attacks on the policy from officials around the world.

The head of the Federal Reserve rounded on critics of the policy, which has prompted accusations that he has sparked a global “currency war” that risks destabilising emerging market economies.

The Fed’s effort “not only helps strengthen the US economic recovery, but by boosting US spending and growth it has the effect of helping support the global economy as well”, Mr Bernanke said on the last day of International Monetary Fund annual meetings in Tokyo on Sunday.

“It is not at all clear that accommodative policies in advanced economies impose net costs on emerging market economies,” he added.

The Fed has faced a barrage of criticism over its decision to expand its balance sheet by a potentially unlimited amount in an attempt to counter high unemployment in the US. Opponents contend that the Fed’s third round of quantitative easing – nicknamed QE3 – has triggered volatile capital inflows into emerging markets, leading to an appreciation of their exchange rates, weighing on trade, and creating threats to financial stability.

Guido Mantega, Brazil’s finance minister and one of the Fed’s most vociferous critics, on Saturday labelled the Fed’s ultra-loose monetary policy as “selfish”.

Mr Bernanke expressed sympathy for these concerns, but said any costs for emerging economies should be weighed against the “very real benefits” of monetary easing by the Fed and other advanced economy central banks. He also said the link between ultra-loose monetary policy and international capital flows was “looser than is sometimes asserted”.

Both the Fed and the Bank of Japan have eased monetary policy in recent months. But Mr Bernanke’s counterpart at the BoJ, Masaaki Shirakawa, appeared far more concerned about the detrimental impact of easing on emerging markets.

Mr Shirakawa warned over the weekend of the “collateral damage” caused by an abundance of easy credit from developed markets to the rest of the world. “With the deepening of globalisation, no responsible policymaker could now dismiss the cross-border spillovers and feedbacks of their policies,” he said.

The BoJ chief called on officials in advanced economies to be more patient. He noted that despite “aggressive” and unconventional monetary policy, the growth trajectory of Europe and the US in the four years following the Lehman crisis had been lower than that of Japan following the bursting of its asset bubbles at the end of the 1980s.

“We have to accept that the growth rate may have to be lower” until excess debt is worked off, Mr Shirakawa said. “Unless we come to terms with this fact, recovery could be endangered by the adoption of inopportune and inappropriate policies, driven by discontent among the general public, that could erode efficiency and destabilise the global economy.”

Christine Lagarde, managing directorof the IMF, indicated that the IMF could relax its position against capital controls to take into account the impact of ultra-loose monetary policy in advanced economies, which she acknowledged was likely to spur large and volatile capital flows to emerging economies.

“We have been working on refining our institutional view on the liberalisation and management of capital flows from the perspective of countries that receive and those that generate capital flows,” she said on Sunday.

The BoJ governor also warned that it could pave the way for the next financial crisis. The current “global easing bias,” he said, “may have parallels with the environment that gave rise to the great credit bubble of the 2000s.”

The Fed and other advanced economy central banks have faced criticism from emerging markets for their policies.

The Fed has also come under attack closer to home. Some lawmakers in Congress have criticised the central bank’s response to the crisis, saying that it has strayed beyond its mandate and that its policies could provoke high inflation. In contrast, the BoJ has often found itself under pressure from lawmakers in Tokyo to step up its response to the country’s economic woes.

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