Yellen Fed Choice Spurs Indonesian Optimism

Jakarta Globe, Bloomberg, October 9, 2013

A file photo dated 10 October 2012 showing Janet Yellen, Vice Chair of
the US Federal Reserve System, attending a seminar. (EPA Photo)

Janet Yellen’s nomination to lead the US Federal Reserve may signal a reprieve for Asian economies including China and South Korea from any immediate reduction of stimulus that could roil markets and capital flows.

Bank Indonesia Deputy Governor Perry Warjiyo said in a mobile-phone message today that tapering of US stimulus may not come into effect immediately with Yellen’s appointment.

Philippine Finance Secretary Cesar Purisima said in a phone message that Yellen’s nomination signals stability, policy continuity and a “steady course for the Fed.”

South Korea said it expects Yellen will “consider well” the effects on other nations of reducing US bond-buying, while Koichi Hamada, an adviser to Japanese Prime Minister Shinzo Abe, predicted the new chairman won’t rush to exit monetary easing.

Asia is grappling with Fed policy shifts and the Group of 20 economies plans to identify market turmoil from central banks’ stimulus withdrawal as a key risk to the global financial system. Emerging-market stocks plunged in May when Chairman Ben S. Bernanke signaled that record easing may be pared, then rebounded when the Fed maintained stimulus last month.

“If the Federal Reserve pulls out the rug underneath Asian markets, it could clearly lead to some nasty repercussions,” said Frederic Neumann, HSBC’s co-head of Asian economics in Hong Kong. “But Yellen is seen as somebody who might withdraw stimulus only gradually and that buys Asian policy makers time to build up the defenses for the day when US interest rates do begin to rise.”

US President Barack Obama will announce the nomination at 3 p.m. in Washington on Oct. 9, a White House official said in an e-mailed statement. If confirmed by the Senate, Yellen, 67, would succeed Bernanke, 59, whose second four-year term ends in January.

“She has rich experience and an impressive resume as a policy maker,” Choi Hee Nam, director general of the South Korea finance ministry’s international finance bureau, said by phone from Sejong today. “I expect her to consider well the ripple effects on other countries” from policy decisions such as altering the Fed’s bond-buying program, Choi said.

No comment was immediately available from the Bank of Japan. China’s central bank and Ministry of Foreign Affairs didn’t immediately respond to requests for comment.

Cao Yongfu, a researcher who follows US economic policy for the government-run Chinese Academy of Social Sciences, said Yellen’s nomination will help sooth China’s short-term concerns that an immediate tapering of Fed bond-buying would cause volatility in capital flows.

Even so, prolonged easing under Yellen may result in dollar depreciation and undermine the value of China’s foreign exchange reserves, Cao said. “Yellen’s big challenge will be to shift Fed policies back to normal from an ultra-loose stance — you can’t always keep your foot on the gas.”

Yellen won the nomination after former Treasury secretary and White House economic adviser Lawrence Summers withdrew from consideration when Democrats on the Senate Banking Committee expressed opposition to his candidacy.

As the Fed’s No. 2 official, she has articulated the case for maintaining highly accommodative monetary policy. In a series of 2012 speeches, she outlined why interest rates could remain near zero into late 2015, and in a 2011 speech she justified the Fed’s first two rounds of large-scale asset purchases with an estimate that the programs would create 3 million jobs.

Yellen isn’t among the Fed policy makers who have pressed this year to pare back asset purchases, a group that includes Esther George, president of the Federal Reserve Bank of Kansas City, Jeffrey Lacker of Richmond, Richard Fisher of Dallas and Charles Plosser of Philadelphia.

“I assume Yellen’s nomination means QE for longer and the exit of QE is likely to be gentle,” said Dong Tao, head of Asia economics excluding Japan at Credit Suisse in Hong Kong. “That would be good news for China,” which is having difficulty maintaining growth momentum just as the “tides of global money printing” may start to turn, Tao said.

Hamada, a retired Yale University professor who advises Abe on monetary policy, said Yellen is “more likely to seek a way to make an economic recovery certain by keeping policy accommodative.” If prospects of an exit weaken, that may put pressure on the yen to strengthen, which risks harm to Japan’s economy and would boost the need for the BOJ to act, said Hamada, who doesn’t speak for the government.

‘Appropriate’ person

At the same time, Hamada said he would “very much welcome” Yellen’s appointment. “She has long experience in central bank policy and she understands the role of monetary policy in the macro economy. She is the most appropriate person to lead the Fed.”

A Bloomberg Global Poll last month of investors, analysts and traders, conducted before Summers’s withdrawal, found 47 percent saying Yellen would preside over the same policy as Bernanke, with 17 percent saying it would be looser and 8 percent seeing tighter conditions. Thirty-five percent said Summers would provide less stimulus than Bernanke.

Yellen has been vice chairman of the Fed in Washington since 2010, helping to craft bond-buying and communication policies. As president of the Federal Reserve Bank of San Francisco in the six previous years, she monitored Asia and oversaw banks with foreign exposure, including Wells Fargo & Co.

She also deepened her institution’s ties to Asia, starting a biennial conference on Asia economic policy in 2009 that attracted central bank officials from China, South Korea, the Philippines, Taiwan and Singapore, according to a list of attendees on the bank’s website.

Yellen oversaw many of the biggest Asian banks doing business in the US, hosted Asian central bankers and financial regulators for get-togethers and traveled often to the region, said David Loevinger, former US Treasury Department senior coordinator for China affairs.

She has a “deep understanding of Asian economies, banks and business practices,” said Loevinger, now an emerging-markets analyst at TCW Group in Los Angeles. “She was less prone to lecturing than other US government officials. Asians appreciated that.”

The concern of emerging markets is that when the Fed does begin tapering its bond buying, it could hurt them by sparking an exodus of cash and higher borrowing costs. Brazil, Turkey, South Africa, India and Indonesia are the most vulnerable, Goldman Sachs Group Inc. strategists said in a Sept. 5 report.

By contrast, the International Monetary Fund said Oct. 7 that Canada, South Korea and Australia are among the countries best placed to weather any global market volatility from the withdrawal of US monetary stimulus. The IMF and World Bank hold annual meetings this week in Washington, where G-20 finance ministers and central bankers will also gather.

Even if it doesn’t serve as central bank to the world, the Fed is still entering a fresh era in which international events will increasingly shape its decisions, according to Barry Eichengreen, a professor at the University of California at Berkeley, where Yellen taught.

In a July paper, he said US unemployment and inflation will be affected as globalization forces the US to be more open to trade and financial transactions, emerging markets eat into its share of the world economy and the dollar’s role as the sole reserve currency is eventually eroded.

“Progressively the Fed is going to have to be more outward looking,” Eichengreen said in an August interview.

Bloomberg