Fed Can’t Avoid Emerging-Markets Blame
January 30, 2014 Leave a comment
Fed Can’t Avoid Emerging-Markets Blame
SPENCER JAKAB
Jan. 28, 2014 5:13 p.m. ET
Ben Bernanke just can’t catch a break.
Three years ago he was forced to defend the Federal Reserve from accusations its bond buying somehow had triggered the Arab Spring, which was just getting under way at the time. Now, with the era of aggressive monetary policy waning, a slump in emerging markets is seen as a dangerous side effect of stimulus being withdrawn.
If the Fed considers those countries’ plight at all Wednesday in its last meeting with Mr. Bernanke at the helm, expect its attitude to be along the lines of his response in February 2011: “It really is up to emerging markets to find the appropriate tools to balance their own growth.”
In the same vein, don’t expect a delay in the expected $10 billion cut to monthly bond purchases because of recent gyrations.
Even so, the question will remain should emerging markets tumble: Is the Fed in any way culpable?
Indirectly, yes. In spring 2011, it is likely rising grain prices played a role in social unrest. But at worst, the round of Fed bond buying then in place exacerbated the impact of poor harvests world-wide. And, of course, it wasn’t responsible for decades of political repression.
As for the latest instability, the Fed was a benign enabler of countries such as India, Turkey, Indonesia, Ukraine, Argentina and South Africa that relied too much on external capital. Yield-seeking investors gave policy makers in those countries just enough rope to hang themselves. Corruption, ill-advised economic policies and political discord are all homegrown phenomena, though.
While the Fed is unlikely to alter policy this week, it might later if things get serious enough to threaten the global economy. It set that precedent after Russia’s default in 1998 began a chain of events that decimated hedge fund Long Term Capital Management. It is safe to say a crisis in some large economies—for example, in China’s shadow-banking system—could pack a far greater punch today than 16 years ago.
So, in a repeat of 1998 or worse, the Fed will have to help clean up the mess. This time, though, it will deserve some blame, too. While assessing the benefits of its unorthodox policies, it weighed them against risks mostly within U.S. borders. Now, some foreign risks it disowned could come home to roost.
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