Rip­ples from US’ QE exit

China Daily (Canada) - - COMMENT -

METIC­U­LOUS AS IT IS, THE FIRST STEP THE US Fed­eral Re­serve has taken to end its ad­dic­tion to cheap money could still spell more trou­ble for the frag­ile global re­cov­ery than the eu­phoric ini­tial re­sponse might sug­gest.

Chi­nese pol­i­cy­mak­ers who are ea­ger to roll out sweep­ing eco­nomic re­forms should thus brace them­selves for a pos­si­ble in­crease in ex­ter­nal un­cer­tain­ties.

On Wed­nes­day, at his last press con­fer­ence as chair­man, Ben Ber­nanke an­nounced that the Fed will ta­per its monthly as­set buy­ing from $85 bil­lion to $75 bil­lion start­ing next year.

As the one who started con­tro­ver­sially at­tempt­ing to save the US econ­omy with newly printed money five years ago, Ber­nanke must hope that it is com­ing to an end and the US econ­omy is now on the mend.

And with US shares soar­ing to record highs, the ini­tial in­vestor re­sponse seemed to in­di­cate many be­lieve that the Fed’s de­ci­sion can be deemed a sig­nal that the US growth prospects are bright enough to with­stand less stim­u­lus spend­ing.

But the fact that the Fed has, at the same time, gone to great lengths to as­sure the mar­ket that it will keep the short-term in­ter­est rate tar­get at zero while mak­ing its with­drawal from its quan­ti­ta­tive eas­ing pol­icy con­tin­gent on the US econ­omy does not jus­tify too much con­fi­dence.

Worse, in­ad­e­quate at­ten­tion has been paid to the im­pact of the Fed’s move on the global econ­omy.

A num­ber of de­vel­op­ing economies have al­ready suf­fered from the jit­tery re­ver­sal of cap­i­tal flows when the Fed first floated the idea that it was plan­ning an exit from its cheap money pol­icy early this year. There is no rea­son for them to lower their guard in the hope that the world’s largest econ­omy has given more con­sid­er­a­tion this time to the ef­fects its mone­tary pol­icy will have over­seas.

As the largest holder of for­eign ex­change re­serves, China is def­i­nitely much bet­ter po­si­tioned than be­fore for the pos­si­ble chain re­ac­tion in ex­change rates and other cen­tral banks’ mone­tary poli­cies the Fed’s de­ci­sion may trig­ger.

But pol­i­cy­mak­ers should bet­ter pre­pare for a less rosy sce­nario than the ini­tial in­vestor re­sponse sug­gests.

If the Fed’s un­con­ven­tional QE poli­cies have in­deed worked the magic of sup­port­ing US growth af­ter the global cri­sis in 2008, how can its with­drawal oc­cur with­out equally sig­nif­i­cant, if not dire, con­se­quences?

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