In interviews, foreign leaders and International Monetary Fund officials said they think the Fed, which has linked any “tapering” of its monthly asset purchases to U.S. economic recovery, may give more weight now to the potential impact on world economic conditions. With the Fed chairmanship changing and a U.S. budget impasse adding to uncertainty about the direction of the country’s economy, the foreign pressure could push back further the start of a process many analysts had expected to begin in September.
“The spillovers that come about from large-country policies were uniformly acknowledged,” said Singapore’s finance minister, Tharman Shanmugaratnam, the head of the IMF’s governing body. He said he left the recent meetings with the sense that any U.S. policy shift was “not imminent” and that the world’s major economic powers would “sort out our problems not just by doing the right things for our own economies but also in cooperation.”
U.S. officials did not respond publicly to the concerns raised by other nations and the IMF about the impact of any upcoming shift in the Fed’s program of quantitative easing, which currently involves the monthly purchase of $85 billion in different securities.
As the U.S. economy strengthens, the Fed is expected to steadily reduce that amount, though it has not said when the change will occur or how fast it will proceed. At some point, the central bank may also start selling the assets it has accumulated in recent years, another point of uncertainty. Eventually, the time will come to raise benchmark interest rates, though that is considered far off.
Other nations, particularly those awash in dollars that flowed overseas as a result of Fed policies, have a stake in the outcome, and Fed Chairman Ben S. Bernanke said last month the central bank is studying the possible impact “very carefully.”
But he and other Fed officials have emphasized that the primary aim is a strong U.S. economy — something that would also benefit the rest of the world.
“My colleagues in many of the emerging markets appreciate that — notwithstanding some of the effects that they may have felt — that efforts to strengthen the U.S. economy . . . ultimately redounds to the benefit of the global economy,” Bernanke said last month.
Few would disagree, and recent studies by the IMF and others have said the United States is retaking its traditional role as a mainstay of global growth.
But in recent weeks, foreign and IMF officials have argued through technical papers and in public appearances that the Fed needs to take a delicate approach as it phases out its crisis-era policies, to lessen the risk of new problems that could be bad for the United States as well.
An IMF study released last week argued that the mere mention of tapering by Bernanke in May caused investors to shift hundreds of billions of dollars out of stock and bond markets around the world.
The fund’s semiannual update on the world economy, meanwhile, not only showed a growth slowdown in major developing countries but also raised a red flag over the large deficits that India, Indonesia, Turkey and South Africa have begun to accumulate with the rest of the world. Those deficits need to be financed, and if the supply of dollars starts to contract, interest rates start to rise or investors begin leaving one set of countries for another, it could touch off the sort of cascading crisis that hit Asian nations in the 1990s.
One IMF study estimated that a one-percentage-point rise in U.S. interest rates — a possible side effect of upcoming Fed decisions — would eliminate $2.4 trillion in the market value of bonds held around the world. There was also, the IMF said, a parallel between the current situation and that of 1994, when a tightening of U.S. monetary policy set forces in motion that led to severe problems in Mexico when the value of the peso collapsed.
That episode illustrates why the Fed may pay attention to more than just the U.S. unemployment rate. With so much trade flowing between the two countries, President Bill Clinton was prompted by the “tequila crisis” to step in with a rescue package he argued was as important for U.S. economic stability as it was for Mexico.
Developing nations have their own work to do, IMF officials said, urging them to speed ahead with economic reforms, budget balancing and other steps that will help prepare for the return of “normal” U.S. monetary policy.
But the Fed, the IMF said, should not act in isolation.
“There was shared sentiment around the room that everyone has to put their house in order,” Christine Lagarde, the IMF’s managing director, said of the meetings, which were unexpectedly dominated by debate over U.S. policy. “Countries that will have to gradually exit from unconventional monetary policy actually care about what it means outside. They care because it has effects . . . at home.”