Rewind & Fast Forward News review and preview
Recently Janet Yellen was sworn in as the new chairperson of the US Federal Reserve. With the global economy still fragile, there are some interesting parallels to be drawn between the role that Yellen will fulfil and the pressures on South Africa’s own Reserve Bank Governor Gill Marcus.
Could they be a force to shape global f inance over the next few years if they worked closer together?
Vunani Securities economist Ilke Smit describes the waters Marcus is navigating: “South Africa is an economy currently struggling with below-potential economic growth with inf lation expected to breach the upper limit of the target band (3%-6%) soon.”
Isaac Matshego, an economist at Nedbank, says that one of Yellen’s major challenges, which is different from Marcus’s, is ending the massive monetary stimulus that has been implemented in the US over the past four years.
The US GDP growth rose to just over 4% in the third quarter of 2013 as both consumer spending and business investment strengthened. Yellen therefore has to normalise US interest rates as the US recovery gains momentum and unemployment continues to drop, says Matshego.
Another d i f f e rence bet ween t he t wo countries is the savings rate. The US enjoys a positive sav- ings rate, whereas SA consumers are traditionally “dis-savers”.
Says Smit: “When interest rates rise consumers do not have a buffer in the form of savings to assist consumption and drive economic growth, and in an environment of positive savings, stimulatory monetary policy has not driven current account def icits wider and encouraged dis-saving – where in SA, these dynamics have adversely impacted the currency, which is currently the main risk to the inflation outlook.”
Both Yellen and Marcus face different challenges as their macro-economic conditions vary vastly. But does that mean that SA should not pursue a relationship with the US Fed or vice versa?
Kevin Lings, chief economist at Stanlib, says that a close working relationship with the US Fed could be valuable to SA in a number of ways. One is the potential for f low of research and information between the two central banks.
The economic research unit at the US Fed is made up of three teams, the Division of Research and Statistics, the Divis i o n o f Moneta r y Affairs, and the Division of International Finance, together employing approximately 450 staff members, about half of whom are PhD economists.
Smit, too, high- lights that there is another economic factor the two could work together on and learn from one another.
Says Smit: “A macro-economic conundrum especially rife in South Africa, which is starting to plague the US economy in ever greater terms, is inequality in income distribution. Unequal income distribution does not affect monetary policy in the short term, but does lower the potential level of economic growth in the long term, which could be something rising the complexity of US monetary policy making in due course.”
Flow of advice is therefore another potential benefit, says Lings, because no central bank has all the answers. “That interaction between the Sarb and the US Fed can be extremely helpful for SA as it can help as well when it comes to policy formulation and studying other models.”
SA’s current Monetary Policy Committee (MPC) framework was adopted from the Bank of England MPC, and was strengthened by former member, Ian Plenderleith. Plenderleith was appointed deputy governor of the Sarb in 2003 under former Governor Tito Mboweni and worked with Marcus and Xolile Guma as joint deputy governors.
Despite being different, economic growth and job creation are top priorities for both central banks. The Fed pursues a dual mandate of price stability and job creation while the Sarb only pursues one mandate, price stability. Lings, however, says that Marcus’s policy suggests that she assumes a dual mandate and takes into account the growth rate and job creation.