Central bank intervention set to continue
Market intervention by the US Federal Reserve and other central banks will continue for the foreseeable future, even as volatility continues to roil emerging markets and other countries, suggest central bankers.
Monetary easing policies by the Fed, the European Central Bank (ECB) and, more recently, the Bank of Japan (BoJ) were designed to mitigate the impact of the financial crisis.
But while the Europe, Japan and the US have enjoyed economic growth, emerging markets have suffered from volatility and capital outflows, acknowledged a panel of central bankers this week at the Credit Suisse Asian Investment Conference in Hong Kong.
“You could tell a story that the world is too volatile now because the Fed isn’t doing what it’s supposed to be doing. I’m here to tell you that we are doing what we’re supposed to be doing,” said James Bullard, a member of the US Federal Open Market Committee and president of the Federal Reserve Bank of St Louis.
“We’re expected to be a guardian of [US] financial stability in a way that we were not before 2007,” noted Bullard. He refrained from using the words financial stimulus, preferring "unconventional policy”.
Others on the panel pointed to effects the Fed's actions have had, but accepted the logic behind such moves.
The Australian and New Zealand currencies rose as the US dollar weakened during QE, and “that was not something we wanted”, says Grant Spencer, deputy governor and head of financial stability at the Reserve Bank of New Zealand.
“Where there’s a trade-off between global growth and US growth, you know that the US is going to pull its weight more towards the US than all the rest of the world,” says Spencer, “just as other countries will pull their weight more heavily towards their own [markets].”
Glenn Stevens, governor of the Reserve Bank of Australia, said: “The Fed is acutely conscious about potential spillovers” that its quantitative easing [QE] and tapering programmes have had on other countries.
He pointed out that policies put in place in Asia have likewise had an impact on the US.
“I don’t think there’s any doubt the that the collapse of investment in Asia [post-crisis], which still hasn’t recovered, and the desire to shift the current accounts one way towards surplus to accumulate foreign-currency reserves ... has had an effect on the global cost of capital [and] on the United States.”
The BoJ has become the latest to launch monetary easing efforts via Abenomics, which carries with it the danger of triggering continued capital outflows from Japan, said Spencer.
An acceleration of financial stimulus in Japan would also weaken the yen, he added. “The risk is that there would be increasing reliance on quantitative easing” at a time when the Fed is winding down its QE programme.
The advent of QE, Abenomics and other so-called unconventional policies is fuelling concerns that central banks will continue to become more powerful and interventionist, acknowledged the panelists.
“Fundamentally, things have changed,” said Spencer. Since the financial crisis, there has been a greater expectation that central banks will restrain excessive asset prices when they are headed for a bubble.
“There’s been a shift towards [a view] where it’s considered appropriate to lean against asset classes”, even in markets where inflation and consumer price indexes have not risen sharply, argued Spencer.
Expanded regulatory oversight in the financial sector by the US government has led the Fed to be “much more involved in regulatory structure”, noted Bullard, and other countries have taken similar steps. “There will be a bigger role for central banks in that regulatory framework,” he added