Friday 20 April 2018

Bernanke plays down 'currency war' with emerging economies

Fed chairman says he will not remove stimulus until unemployment decreases

Federal Reserve Board Chairman Ben Bernanke
Federal Reserve Board Chairman Ben Bernanke

Craig Torres

The chairman of the US Federal Reserve Ben Bernanke has played down talk of a currency war between established economies and rising powers such as Brazil and China.

Low interest rates in advanced economies benefit the world economy without disrupting trade, he said at an event hosted by the London School of Economics.

"The benefits of monetary accommodation in the advan- ced economies are not created in any significant way by changes in exchange rates," Mr Bernanke said. "They come instead from the support for domestic aggregate demand in each country or region."

The US economy is completing its fourth year of growth, but inflation is below target and economic gains have not been strong enough to force a significant reduction in unemployment.

Mr Bernanke says jobs growth is needed before he will withdraw economic stimulus.

Last month the US unemployment rate stood at 7.7pc, and the personal consumption expenditures price index rose just 1.2pc in January.

The Fed's "artificially low" main interest rate has put upward pressure on several currencies, threatening to erode the competitiveness of those nations' economies, Mohamed El-Erian, Pacific Investment Management Co's chief executive officer, said on March 15.

"Ultimately, they are forced – Mexico has been forced, Brazil has been forced, Korea has been forced, Japan has been forced – into doing exactly the same thing," as the Fed, Mr El-Erian said.

However, Mr Bernanke said the distinction between policies aimed at reviving growth versus those aimed at trade diversion, exchange rate devaluations "or other protectionist measures is critical".

Mr Bernanke said that emerging markets may be understandably wary of monetary easing in advanced economies because an appreciation of their own currencies may undermine an export-led growth strategy. Also, their smaller financial systems may be vulnerable to inflows of capital seeking higher interest rates, producing asset price bubbles.

Still, the trade-weighted real exchange rates of emerging market economies, "with some exceptions", haven't changed much since the financial crisis in late 2008, Mr Bernanke said.

'Balanced'

"Even if the expansionary policies of the advanced economies were to lead to significant currency appreciation in emerging markets, the resulting drag on their competitiveness would have to be balanced against the positive effects of stronger advanced-economy demand," he said.

Mexico's central bank unexpectedly cut its benchmark interest rate this month for the first time since 2009, while Haruhiko Kuroda, the new Bank of Japan governor, has pledged to do more to beat deflation.

"The advanced industrial economies are currently pursuing appropriately expansionary policies," Mr Bernanke said. "These policies confer net benefits on the world economy as a whole and should not be confused with zero or negative-sum policies of trade diversion."

Mr Bernanke also said he was "sceptical" that interest rate differentials were the "dominant force" behind capital inflows into emerging eco- nomies.

Irish Independent

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