As the Federal Reserve weighs an imminent cut in its extraordinary economic stimulus, many outside the United States are pleading with the Fed, “Would you consider the impact on us too?”
That essentially was the message Friday from the head of the International Monetary Fund, Christine Lagarde. Speaking at an opening luncheon of the Fed’s summer conference in Jackson Hole, Wyo., Lagarde turned the spotlight on what has emerged as the main global economic issue of the day: the bold actions of central banks and, as she put it, how these policies “in one corner of the world can reach all corners.”
While the IMF’s managing director spoke generally about central banks, it was clear that she was focused on the Fed and the widespread expectation – some would say fear – that next month it will start scaling back a massive bond-buying program that has helped hold down long-term interest rates and, until recently, kept emerging markets flush with cheap money.
In recent weeks, as interest rates in the U.S. have jumped in anticipation of the Fed’s tapering of stimulus in September – a view reinforced this week from minutes of the Fed’s last meeting – investors have pulled cash from India, Brazil, Indonesia and some other developing economies. That has resulted in steep declines in their currencies.
The rise in interest rates and the flow of capital back to the U.S. and other developed nations aren’t just related to the Fed. They reflect the somewhat brighter growth prospects in developed economies, Europe and Japan included, while the rapid declines in emerging-market currencies point to some long-standing structural and financial challenges in those countries.
Still, there’s little question that the Fed’s unprecedented flood of cash into the financial system since the recession has rippled across the globe. Previously, that prompted some complaints from developing nations that there was too much capital flowing into their markets, bringing inflationary pressures and hurting exports as their currencies rose in value. But now, Lagarde and many others have the opposite concern: the increased risk of a sharp economic slowdown in emerging markets.
“Even if managed well,” Lagarde said of a central bank’s exit from easy-money policies, the movement could still present an “arduous obstacle course” for other countries. Lagarde said what’s needed is greater policy coordination and cooperation for the sake of the entire globe.
“No country is an island,” she said in prepared remarks delivered to central bankers from around the world, as well as other foreign dignitaries, economists and investors. “Looking at the wider effect is in your self-interest,” she said. “It is in all of our interests.”
Notably absent from the Kansas City Fed-sponsored annual conference over the weekend was Ben Bernanke, who is expected to step down when his second four-year term as Fed chairman expires in January.
The Fed’s vice chair, Janet Yellen, a top contender to replace Bernanke, is at the gathering, but not expected to give a speech. Another front-runner for the job is former Treasury secretary Lawrence Summers, who is not attending the annual symposium in the breathtaking Grand Teton range.