A speech delivered this week in Tokyo found Federal Reserve Chairman Ben Bernanke defending the Fed's most recent attempt to jumpstart the economy, while also taking a thinly-veiled jab at China's currency policy.
The Fed's announcement last month to buy $40 billion worth of bonds per month to boost the U.S. raised a number of eyebrows abroad, as the program could pose some general risks to less-developed economies. "Although the monetary accommodation we are providing is playing a critical role in supporting the U.S. economy, concerns have been raised about the spillover effects of our policies on our trading partners," said Bernanke at the seminar titled "Challenges of the Global Financial System: Risks and Governance under Evolving Globalization," cosponsored by the Bank of Japan and the International Monetary Fund (IMF). "In particular, some critics have argued that the Fed's asset purchases, and accommodative monetary policy more generally, encourage capital flows to emerging market economies."
Specifically, Bernanke said that critics argue that these capital inflows cause undesirable currency appreciation, "leading to asset bubbles or inflation, or economic disruptions as capital inflows quickly give way to outflows."
In his attempt to assuage these concerns, Bernanke noted that the effects of these capital inflows on an emerging market doesn't just depend on the Fed, but also on the monetary policy of the country in question. Though he never referred to China by name, his comments seemed aimed squarely at Asia's largest economy, whose name has become synonymous with currency manipulation in the United States.
"In some emerging markets, policymakers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth," said Bernanke. "However, the perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation."
"In other words, the perceived advantages of undervaluation and the problem of unwanted capital inflows must be understood as a package—you can't have one without the other," he added.
Read a full copy of Chairman Bernanke's comments here.
- Jacob Barron, CICP, NACM staff writer