Monetary policy 'benefits all'

Updated: 2013-02-27 11:30

By Zhang Yuwei in New York (China Daily)

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 Monetary policy 'benefits all'

Federal Reserve Board Chairman Ben Bernanke testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on The Semiannual Monetary Policy Report to the Congress in Washington on Tuesday. Gary Cameron / Reuters

US economy stimulus will strengthen foreign markets, says Fed chief

The US central bank's use of bond-buying as a stimulus tool helps create "mutually beneficial" results for the world's biggest economy and other countries including China, Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee on Tuesday.

Bernanke testified that monetary policy in pursuit of domestic goals shouldn't be seen as "a currency war" but rather a "positive-sum game".

"It's not like putting tariffs on your imports so that you can beggar-thy-neighbor to the benefit of your domestic industry. That's not what we're doing," he said.

"If all the major economies that need support provide stimulus and extra aggregate demand, that's mutually beneficial. Because, for example, China depends on the strength of Europe and the US as their export market. This is a positive-sum game, not a zero-sum game."

Since the financial crisis of 2008-2009, the Fed has launched three rounds of what's known as quantitative easing - a policy in which a central bank increases the money supply so that it can buy debt assets like Treasury bonds and certain mortgage-backed securities from commercial banks, particularly when interest rates are so low they can't be cut further, as is the case in the US now.

The policy, which has been derided by some experts as money-printing, is meant to get more liquidity into the financial system when conventional policies like interest-rate cutting are no longer effective. In September 2012 the Fed announced that the policy - dubbed QE3 by some - wouldn't have a fixed end date.

Lawrence Goodman, president of the Center for Financial Stability, a New York think tank, called QE3 "a bet being waged over time".

"Monetary policy aimed at domestic objectives benefits China in the short term, by helping to keep the global economy afloat," he said. "However, distortions in financial markets related to this untraditional monetary policy can prove to be a substantial cost in the future.

"Countries with relatively high interest rates will be more heavily influenced by the move to QE by many central banks around the world in addition to the Fed."

IM "Mac" Destler, a professor at the University of Maryland's School of Public Policy, agrees with Bernanke.

"QE is positive-sum in that boosting US economy helps world growth," Destler said. "Of course, QE tends to push the dollar down via the impact on interest rates."

But "further modest rises" in the value of the yuan currency relative to the dollar will likely help China rebalance its economy, said Destler, who is also a fellow at the Peter G. Peterson Institute for International Economics, a conservative Washington think tank.

Ronald Schramm, founder and CEO of analytics firm China Macro Finance, said the People's Bank of China and the Fed function differently, which helps explain Bernanke's assurance that a "currency war" is unlikely.

China, joined by other countries such as Brazil, India and South Korea, raised concerns about the Fed's easy-money policy after the second round of the QE was launched just before a Group of 20 summit in Seoul in 2010.

Experts say that, generally, quantitative easing puts pressure on Beijing to allow appreciation of the yuan, which now trades within a 1 percent band against the dollar.

Bernanke, in his Senate testimony on Tuesday, also urged lawmakers and President Barack Obama's administration to avoid $85 billion in across-the-board cuts in federal government spending that are set to take effect on Friday. He said the reductions could combine with earlier tax increases to create a "significant headwind" for the modest recovery in the US economy.

"To this point, we do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery and more rapid job creation," the central banker testified.

Schramm pointed out that unlike the central banks of China and other countries, the Fed isn't only required by law to use monetary policy to control inflation, it has the added role of trying to ensure high employment.

"The PBOC's mandate is the stability of the currency," he said.

While Bernanke's focus is largely domestic, a side effect of the stimulus policy, Schramm said, is greater demand for exports from China and other countries.

"This is win-win," the executive and former Columbia University business professor said. "If the long-run result is higher US inflation, the Chinese authorities should have plenty of time to adjust their reserve portfolio in an orderly way."

But Daniel Hwang, chief currency strategist at New York-based Gallant Capital Markets, said Bernanke's comments aren't a "game-changer for the strained landscape defining the current dynamics between China's and the US' economies".

He predicted Chinese economic growth will prove resilient in coming quarters.

"The US economy is moving toward the position that has mired many eurozone economies in their respective ruts - the implementation of tighter fiscal-policy measures despite conflicting easier monetary policy to stimulate the economy," Hwang said.

(China Daily 02/27/2013 page1)