US Federal Reserve pressed to take care with stimulus pullback

IMF Managing Director Christine Lagarde speaks at the Development Committee on Oct 12, 2013 at the World Bank in Washington, DC. Global finance chiefs stepped up calls on Saturday for the Federal Reserve to take care in moving to cut its stimulu
IMF Managing Director Christine Lagarde speaks at the Development Committee on Oct 12, 2013 at the World Bank in Washington, DC. Global finance chiefs stepped up calls on Saturday for the Federal Reserve to take care in moving to cut its stimulus, as emerging countries wrestle with financial turbulence. -- PHOTO: AFP 

WASHINGTON (AFP) - Global finance chiefs stepped up calls on Saturday for the Federal Reserve to take care in moving to cut its stimulus, as emerging countries wrestle with financial turbulence.

Numerous countries at the annual meeting of the International Monetary Fund and the World Bank said the US central bank's expected tightening had already added challenges to their struggling economies, stirring capital outflows and pressing their currencies lower.

The IMF's steering committee, the International Monetary and Financial Committee, itself cautioned the Fed and other central banks in advanced economies when they begin "normalising" their ultra-low interest rates and easy-money policies.

"The eventual transition toward the normalisation of monetary policy... should be well-timed, carefully calibrated, and clearly communicated," the IMFC said.

Others were more frank, after struggling with the consequences of a surge in interest rates in the five months since the Fed signaled it was close to "tapering" its US$85 billion (S$106 billion) a month asset-purchase programme.

Africa's representatives at the IMF and World Bank said in a statement they were "worried about uncertainty" arising from the pullback from so-called unconventional monetary policies - those which have flooded cheap dollars, euros and yen onto the global economy for some five years.

"We call on policymakers in advanced economies to be aware of negative spillovers of their policy actions, and ensure that stimulus exit strategies are communicated clearly," they said.

Russian Finance Minister Anton Siluanov said he expects only more turmoil in the markets when the Fed moves.

"The assumption that the asset-price correction that began this summer has already been largely completed does not seem to be plausible to us," he told the IMFC.

"Even the first hint on the exit from unconventional monetary policies in advanced economies has already led to many difficulties for emerging-market economies." Brazil's central bank governor, Alexandre Tombini, said that economic pessimism had spread due to the expected Fed tightening.

Mr And Yi Gang, deputy governor of the People's Bank of China, warned of a "disorderly" wind-down of stimulus programs.

"While unconventional monetary policies helped stabilize growth and financial markets in advanced economies after major crises, more attention should be given to the risks associated with the prolonged use and disorderly exit of such policies."

"Policy coordination and clear and effective communications will be essential to ensure the smooth and orderly exit of unconventional monetary policies," he said.

US interest rates jumped suddenly and sharply in the three months from May, when the Fed signaled it was moving to cutting back its quantitative-easing stimulus, predicting the entire programme would be ended by mid-2014.

Already slowing emerging economies from Indonesia to Turkey to Brazil, and many poorer ones in Africa and South America, experienced sudden outflows of capital, sinking their equity markets and their currencies, and forcing interventions to stabilise the markets.

The Fed still has not begun its taper, deciding so far that the US economy is not ready for it, but most expect the stimulus reductions to come in the next few months.

Fed Chairman Ben Bernanke has reaped criticism for allegedly poorly communicating his intent.

On Saturday, Austrian central bank chief Ewald Novotny, a governor of the European Central Bank, called on the Fed to communicate better the direction of its monetary policy to minimize the impact of the taper.

Speaking as representative of Austria, Turkey and six Eastern European countries at the IMF, he said in a statement to the IMFC: We "encourage the US Federal Reserve to engage in international dialogue in order to minimize unwarranted negative spillovers from the exit of its unconventional monetary policy measures on other countries."

Still, the IMF has repeatedly warned the emerging economies to fortify themselves against likely more turbulence and higher interest rates as the global economy transitions to a more "normal" monetary situation.

Brazil's Tombini said that is what his country has done, piling up foreign reserves and other strong buffers.

But he warned that if the Fed and others moved too fast, it could easily overshoot and depress global growth.

"If long-term real interest rates rise too steeply, the US recovery could stumble and the negative effects would be felt worldwide," he said.