Central bankers from around the world are telling their American counterparts that they are ready for a US interest rate hike and would prefer that the Federal Reserve make the move without further ado.
In private and in public at last week’s global central banking conference in Jackson Hole, the message from visiting policymakers was that the Fed has telegraphed an initial monetary tightening and, following a year-long rise in the dollar, financial markets globally are as ready as they can be.
The powerful group gathered at the end of a roller-coaster week in markets in which the Dow tanked by 1,000 points on Monday on concerns of a slowdown in China but recovered to trade higher by the end of the week. Remarks by Fed officials that liftoff could come in September were blamed by some for that volatility.
But for Agustin Carstens, the top central banker in Mexico, a rate hike by his neighbor sends an encouraging sign of economic health, even if it does force growth-challenged Mexico to also raise rates within days.
“If the Fed tightens, it will be due to the fact that they have a perception that inflation is drifting up, but more important that unemployment is falling and the economy is recovering,” Carstens told Reuters in an interview.
“For us, that is very good news,” he added.
While Yao Yudong, head of the People’s Bank of China Research Institute of Finance and Banking, last week blamed the Fed for the market turmoil and said a US hike should be delayed, most central bankers from emerging markets contacted by Reuters at Jackson Hole and over the past month shared Carstens’ view.
An end to more than six years of rock bottom US rates will touch off a wave of potentially painful adjustments as countries deal with the likelihood of an even stronger dollar as well as capital outflows from some emerging markets and changes in the relative prices of traded goods. An end to uncertainty for policymakers, however, could outweigh those difficulties.
Effects of the Fed’s easy money have been felt in countries as diverse as Chile and Switzerland. Annual inflation in Chile has consistently come in above the bank’s target range of 2 per cent to 4 per cent.
In Switzerland, the central bank has been forced to keep rates negative since it removed its cap on the franc at 1.20 to the euro, sending the currency soaring and putting a major strain on the export-dependent Swiss economy.
“Latin America has seen a surge of inflation” as countries “internalize” the evolution of Fed policy, Central Bank of Chile Governor Rodrigo Vergara told the conference.
TWO YEARS OF PREPARATION
Those sorts of trends have been under way for some two years, when then Fed chairman Ben Bernanke set off a global “taper tantrum” when he suggested the central bank was preparing to scale back its bond-buying program.
Two years after the taper tantrum, Fed officials say some volatility is unavoidable when the shift in policy occurs.
“For emerging markets, the smaller economies, they’re often looking for a weaker currency. So from their perspective a tightening move by the Fed might be helpful to weaken their currency and help them do what they want to do,” St. Louis Fed President James Bullard said in an interview.
There are opponents to a hike – most notably the People’s Bank of China and the International Monetary Fund, which has urged the Fed to delay until the world economy is on a stronger footing.
But even frequent Fed critics said at Jackson Hole that the time was coming to hike.
“It’s a long anticipated event,” Reserve Bank of India Governor Raghuram Rajan said on a conference panel, sitting alongside Fed Vice Chairman Stanley Fischer. “It has to happen some time – everybody knows it has to happen – but pick your time.”
Those comments were supported by central bankers from Japan, South Korea and Indonesia. When asked earlier this month whether he thought the Fed should hike in September, Bank Indonesia Senior Deputy Governor Mirza Adityaswara told Reuters in Jakarta: “The more certainty there is, the better.”
A senior South Korean policymaker echoed that sentiment.
“A lift at an already expected timing would be better in a sense that it clears up one of the big uncertainties over the issue and it would mean the US economic recovery is deemed sustainable,” he said, speaking on condition of anonymity as he was not authorized to comment publicly by the Bank of Korea.