Last week, I wrote that the upcoming Kabuki theatre in Congress, over a possible government shutdown and the debt ceiling, might convince the Federal Reserve to postpone the QE tapering past its next rate-setting meeting in mid-September. This week, I’m wondering whether the planned slowdown in asset purchases might not happen until next year.
The strongest argument I can think of for why the Fed might wish to sit tight for that long goes as follows. The global economy is now facing at least three potential cataclysms: A U.S. debt default (unlikely, I know, but still a possibility); a debt crisis in emerging markets (also unlikely, though less so), and a hard landing in China. Add a fourth one if the military strike against Syria does happen and then turns into a Middle East-wide quagmire. The actual start of tapering would probably add a fifth shock, but it is the easiest one to postpone. Of course, waiting too long to unwind QE would be dangerous, but would a few months matter? As former Israeli central banker and unlikely Fed chair hopeful Stanley Fischer noted last weekend, the exact timing “doesn’t matter hugely except to a few people who have positions they are holding.”
In other words: Why start a controlled fire when half of the forest is already burning or dangerously close to going up in flames?
Another argument for holding off came from International Monetary Fund chief Christine Lagarde, who urged more coordination among the world’s leading central banks in order to ensure an orderly exit from QE.
Many have pushed back against the notion that the Fed should time its tapering based on what best suits, say, India and Brazil. “The preferred solution, in the opinion of many of these countries, is for the United States to internalize the effects of its monetary policies – more specifically, not to exit or at least to do so at a time that is more convenient for others,” Deputy Bank of Canada Governor John Murray recently said in prepared remarks for a speech about the likely effects of the end of QE. According to Murray, rather than whining — I’m being a bit more blunt than the governor here — countries facing capital outflows would do better to let their exchange rates flow and “review the stance of their own fiscal and monetary policies to determine whether there is anything that requires adjustment.” (I believe you can read the latter as: “Work on cutting runaway fiscal deficits, which are scaring away investors, and use tighter oversight and financial regulation to combat pockets of financial instability, should they emerge.”)
There are also concerns that the Fed might become too preoccupied with political events in general, be they domestic (what will Congress do) or international (e.g. what do India and Brazil think). This is part of the long-running worry that the new monetary policy activism inspired by the financial crisis threatens central banks’ political independence.
The reasoning is that central banks that have assumed broad regulating powers over the financial system will end up engulfed in politics. Prime examples are the U.S. Fed’s involvement in home mortgages or the Japanese central bank’s efforts to end decades of stagnation.
Still, delaying tapering for a few more months might be in order. Murray, for one, noted that forward guidance from the Fed about the timing and modality of its exit will be essential in helping emerging economies plan ahead for the spillover effects. If that’s so, perhaps the Fed should wait a little longer for international players to digest and adjust to the news. I don’t think that could be characterized as undue foreign influence on the Fed. There’s a difference between maintaining political independence and factoring in political realities that will affect the impact of monetary policy. Ignoring such realities could compromise years of efforts to breath life into this fledgeling, feeble global recovery of ours.
Erica Alini is reporter based in Cambridge, Mass., and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy.