Global financial stability is at risk as central banks draw back from ultra-easy policies that have flooded the world with cash, because emerging markets lack defences to prevent potentially huge capital outflows, top officials have been warned.
Central bankers from around the world, devoting the second day at their annual Jackson Hole policy retreat to the threats posed by global liquidity, heard two academic papers on the challenges, sparking a debate on actions and on coordination.
Bank of Japan governor Haruhiko Kuroda told the audience, which included top officials from advanced as well as emerging economies, that the bold measures he had championed to spur his nation’s moribund economy were bearing fruit.
"The bank’s [policy] has already started to exert its intended effects," Mr Kuroda said. The Bank of Japan has embarked on an aggressive bond-buying campaign to lift inflation in his country to 2%.
Easy money policies used to depress interest rates in Japan, Europe and the US had sparked a flood of capital into emerging markets as investors sought higher returns. Now, however, the US Federal Reserve has said it plans to reduce its bond-buying stimulus by year end, with an eye toward drawing it to a close by mid-2014.
Federal Reserve Bank of Atlanta president, Dennis Lockhart made clear that tapering could begin next month, provided the economic news between now and then was not dramatically bad.
"I can get comfortable with September, providing we don’t get any really worrisome signals out of the economy between now and the 18th of September," he told Reuters, referring to the Fed’s next meeting, which is on Sept 17-18.
Concerns over Fed tapering has sparked an exodus of cash from emerging markets, including India and Brazil, whose currencies and stock markets suffered steep losses this week.
There was also discussion about the need for emerging market nations to develop tools to control credit flows. Without such tools, these countries could lose the ability to control domestic financial conditions with monetary policy.
Don Kohn, a former Fed vice chairman and a candidate for the top job when chair Ben Bernanke’s term ends in January, countered the claim that monetary policy might be too loose globally, citing elevated jobless rates in rich countries.