“A foolish consistency is the hobglobin of little minds…”

Ralph Waldo Emerson

Before this week’s announcement by Federal Reserve Chairman Ben Bernanke that the Fed would continue its asset purchases under Quantitative Easing 3, finance ministers and other leaders in emerging market nations had been voicing their concerns over the prospect of U.S. policymakers winding down their operations (see here). They feared that higher interest rates in the U.S. would bring back the capital that had flowed out in search of higher returns, which would leave the emerging market officials in the uncomfortable position of raising their own interest rates or watching their currencies depreciate. The calls for the Federal Reserve to exercise caution peaked at the G20 leaders summit in St. Petersburg, where the final communiqué called for “Further changes to monetary policy settings…to be carefully calibrated and clearly communicated.”

It would be easy to dismiss the foreign reaction on the grounds that there was a large measure of hypocrisy in these exhortations to the Federal Reserve to move slowly.  Many of these officials had previously castigated the Federal Reserve for the currency appreciations that accompanied the earlier capital inflows. Surely, it can be claimed, they should welcome a reversal in Federal Reserve policy.

But the calls for caution demonstrate that a country’s economic welfare incorporates many diverse interests that exercise influence at different times. The worries voiced earlier about currency appreciation were based on the fears of exporters that they would be adversely affected by the resulting increases in prices in foreign markets. Their grievances were heard sympathetically by domestic policy officials who have been dealing with an unsteady recovery from the Great Recession of 2008-09. The decline in import prices was of little import, as inflation has not been a concern. Human nature dictates that we resent adverse changes and take for granted those that benefit us. Moreover, Mancur Olson pointed out that when the benefits are diffuse and the “pain” concentrated, it is not surprising that the voices of those who feel threatened are predominant.

Capital outflows and currency depreciations, on the other hand, will affect other interest groups. Those who have liabilities denominated in dollars fear a rising burden in repaying their debts. Domestic firms dependent on imports worry about their higher costs. Regulators of domestic financial markets are anxious about financial volatility and declines in asset prices. Finance ministry and central bank officials fret about the financing of current account deficits. It would be surprising if their calls for protective actions were offset by a wave of messages from exporters jubilant at regaining market share.

When U.S. interest rates do rise, those outside the U.S. who are adversely affected will register their complaints. Their government representatives will respond by criticizing the Federal Reserve for ignoring the global impact of their policies. It may be inconsistent, but not hypocritical, for them to serve whichever domestic interests have the largest megaphones.