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The Federal Reserve's policy of keeping interest rates low for a prolonged period, including through purchases of government and mortgage bonds, has been broadly beneficial to the world economy, Fed economist Steven Kamin finds in new research.
Kamin's findings push back against the complaints of some overseas finance officials that aggressive monetary easing by the Fed and other rich-country central banks has been destabilizing to their economies by making capital flows in and out of the country more volatile.
Emerging-market currencies have come under severe pressure in recent months as fears mounted that the Fed could be on the verge of raising interest rates from effectively zero for the first time in nearly a decade.
"Yes, monetary policy spillovers can indeed pose some challenges to some economies in some circumstances," Kamin said at a conference at the Peterson Institute for International Economics. "But more generally it seems the evidence suggests that these spillovers are not unduly large, and in many cases spillovers can actually be stabilizing for the global economy."
So why the complaints? For one thing, blaming the Fed makes for pretty costless political theater. Also, many countries have attempted to manage their exchange rates vis-à-vis the US dollar in an effort to maintain export competitiveness.
That, says PIIE senior fellow and former Fed economist Joseph Gagnon, is a chief reason for why such monetary policy "spillovers" might be magnified.
Kamin said fears that the Fed's eventual interest rate increase, which keeps getting pushed back because of unexpected weakness in key pockets of the US and global economies, are overdone.
"This normalization of US monetary policy that people are talking about will not be a policy shock," he said. "Instead, it's going to be predicated on and a response to continued strength in the US economy, and that continued strength is going to support foreign GDP."
In response to a historic financial crisis and deep recession, Fed officials slashed interbank borrowing costs to effectively zero in December 2008, embarking on three rounds of asset purchases aimed at keeping long-term rates down and supporting economic recovery. These became known as quantitative easing or QE.
Discussing the findings, Tae Soo Kang, a senior research fellow at the Korea Institute for International Economic Policy (KIEP), previously a deputy governor of the Bank of Korea, took issue with the time periods selected for Kamin and Gagnon's research.
"The data may be skewed toward the easing period. We don't have any hard evidence of the tighter period," he said. "Existing evidence may not be applicable to the future."
As for the role of exchange rates in providing some of the benefits of monetary policy, this was underscored in a separate paper by Reuven Glick and Sylvain Leduc of the Federal Reserve Bank of San Francisco. It found that surprises in unconventional Fed policy like asset buys "had large and significant effects on the value of the dollar" of the order of "roughly three times that following conventional policy changes prior to the crisis."
This is hardly the salvo of a currency war, but merely an acknowledgement that a weaker dollar is one of the avenues through which the benefits of Fed policy can be transmitted to the economy.
