Pop quiz: which U.S. policymaker said last week: “We can’t solve everyone else’s problems anymore” in response to foreign criticism of U.S. handling of what issue?
a—Federal Reserve Chair Janet Yellen, responding to criticism by foreign central bankers of the Fed’s tapering of its asset purchases;
b—Treasury Secretary Jack Lew, following denunciations of the refusal of the U.S. Congress to pass legislation that would enable IMF quota reform;
c—an anonymous White House aide, defending the Obama administration’s response to the turmoil in the Ukraine.
The correct response is c. But Ms. Yellen and Mr. Lew, who are attending the conference of G20 finance ministers and central bank heads in Sydney, might be forgiven if they held similar (but unspoken) sentiments.
The Federal Reserve has been criticized for not coordinating its policies with its peer institutions, particularly in those emerging markets that have had capital outflows and declines in equity market prices. But the critics have not spelled out precisely what they believe the Federal Reserve should do (or not do), given its assessment of the state of the U.S. economy. Domestic central banks respond to domestic conditions. In some cases, those conditions are linked to the global economy, and a central banker who ignored those linkages would only be postponing the implementation of stronger measures. But is that the case here?
The IMF came the closest to offering a specific criticism:
Advanced economies should avoid premature withdrawal of monetary accommodation as fiscal balances continue consolidating. Given still large output gaps, very low inflation, and ongoing fiscal consolidation, monetary policy should remain accommodative in advanced economies. There is scope for better cooperation on unwinding UMP, including through wider central bank discussions of exit plans.
Does anyone think that the Federal Reserve no longer intends to “remain accommodative”? Are more discussions the only missing element of the Federal Reserve’s plans? That would be surprising, since central bankers have many opportunities to speak to each other, and usually do.
The IMF did not let the emerging market countries off the hook:
In emerging market economies, credible macroeconomic policies and frameworks, alongside exchange rate flexibility, are critical to weather turbulence. Further monetary policy tightening in the context of strengthened policy frameworks is necessary where inflation is still relatively high or where policy credibility has come into question. Priority should also be given to shoring up fiscal policy credibility where it is lacking; subsequently buffers should be built to provide space for counter-cyclical policy action. Exchange rate flexibility should continue to facilitate external adjustment, particularly where currencies are overvalued, while FX intervention— where reserves are adequate—can be used to smooth excessive volatility or prevent financial disruption.
Critics are on firmer grounds when they criticize the U.S. for not passing the necessary legislation to change the IMF’s quota allocations. But perhaps they should not take their annoyance out on Mr. Lew. The U.S. Congress did not approve the needed measures for a number of reasons, none of them particularly compelling. Mr. Lew would be delighted to see the situation change, but that is unlikely to happen.
What, then, can be done at the G20 meeting? If allowing everyone to voice her or his frustrations with the U.S. serves some useful purpose, then all the air miles on the flights to Sydney will have been earned. Perhaps IMF Managing Director Christine Lagarde can serve as mediator/therapist. But before everyone piles on, it may be worth reflecting that the Federal Reserve is not the only central bank with policy initiatives that may ripple across national borders.
I was initially amused by the global criticism that the Fed has received in its decisions to cut back on its bond-buying program. Especially since, as Professor Joyce noted, “Domestic central banks respond to domestic conditions.” It is almost as if countries feel it is a ‘right’ for them to be consulted and represented in the Fed’s decisions although they are not part of the United States!
I wondered if this is a signal for the continuous globalization of financial systems…country borders don’t have the power to start and stop financial issues. Policies implemented in the United States now definitely have the power to influence economies all around the world — this is especially the case for advanced economies that have such high stakes in the global economic sphere.
So, once I consider this reality, it does make perfect sense why foreign countries would be unhappy with the Fed’s lack of sensibility to be cognizant of its global influence. I still don’t see an increase in the interaction/consultation of central banks (those beyond the US as well) anytime soon…even if the G20 meetings are used to voice these complaints, will the Fed change anything? Likely not!
But should the Fed restructure its plan to coordinate with the policies of other central banks? At its core, the Fed’s mission is to keep unemployment and inflation low. While I agree that monetary policy in the US has effects that rebound outside our borders, the Fed’s ultimate responsibility is to the citizens of the US.
I agree with Cristina that the job of the Federal Reserve is first and foremost to follow their mandate (low unemployment/inflation). It is also not unreasonable to expect emerging markets to work towards solving their economic woes. That being said, it is clear that in a globalized economy central bank policies will inevitably have consequences beyond the economy of the home country. At the G20 conference Yellen said that the Fed will look at the international situation while forming policies. By all accounts she was very well received at the conference. I think this coupled with the nomination of Stanley Fischer, a well regarded international macroeconomist, for vice chair bode well for the future of the Fed’s relationship with other countries. Tapering will certainly continue, but I expect that it will be very measured going forward.
I just heard that Fed decided to stop QE soon in 2014 which becomes another controversial action that the Fed has taken. However, it might be the right “accommodation” for US economy since QE has become very large. On the other hand, US economy seems to grow steadily especially on the current stock market and some housing market. (I have seen houses being sold at higher prices this year in Wellesley) Thus, US economic market seems recover well under the Fed’s policies, G20 has legitimate right to ask Fed, as a domestic financial institution, to be responsible for the global market change.
While I agree that the Fed is an United States’ institution, primarily responsible for the domestic economy, the recent financial crisis has emphasized that the U.S.’ actions do not affect only the domestic sphere.
The communique from the G20 emphasizes the importance of flexible exchange rates and advanced economies’ accommodative monetary policies, as well as communication between central banks; this reflects the importance of maintaining a strong global economy. The members of the G20 must take responsibility. Therefore, the Fed cannot ignore the global effects of their policies or the effects of other countries’ problems on the domestic economy.