Sender, Foley, and Fleming write for The FT:
Today, many analysts fear the knock-on effect any Fed tightening will have, particularly on emerging markets, especially when combined with a strong dollar.
Messrs Dalio and Dinner wrote: “If one agrees that either a) we are near the end of the developed country central bankers’ ability to be effective in stimulating money and credit growth or b) the dollar is the world’s reserve currency and that the world needs easier rather than tighter money policies, then one would hope that the Fed will be very cautious about tightening.”
Martin Wolf on related topics is also instructive. I see a few possibilities:
1. Stock and bond markets are at all-time highs, and we Americans are not so far away from full employment, so if we don’t tighten now, when? Monetary policy is most of all national monetary policy.
2. It’s all about sliding along the Phillips Curve. Where are we? Who knows? But risks are asymmetric, so we shouldn’t tighten prematurely. In any case we can address this problem by focusing only on the dimension of labor markets and that which fits inside the traditional AD-AS model.
3. The Fed’s monetary policies have created systemic imbalances, most of all internationally by creating or encouraging screwy forms of the carry trade, often implicit forms. A portfolio manager gains a lot from risky upside profit, but does not face comparable downside risk from trades which explode in his or her face. The market response to the “taper talk” of May 2013 (egads, was it so long ago?) was just an inkling of what is yet to come. There is no way to avoid that problem, no one ever will be readier for the adjustment than they are now, so we have to get it over with and take the (international) pain sooner rather than later. So what if a bunch of foreign companies go bankrupt because of dollar-denominated debt? They are insolvent anyway.
4. The Fed’s monetary policies have created systemic imbalances, most of all internationally by creating or encouraging screwy forms of the carry trade, often implicit forms. Fortunately, we have the option of continuing this for another year or more, at which point most relevant parties will be readier for a withdrawal of the stimulus. That is what patience is for, after all. To get people ready. To allow prudent Indonesian, Chinese, and Brazilian foreign companies to unwind or hedge their positions in a careful and measured manner, as they are wont to do. After all, the taper talk of May 2013 was just talk, so a little more talk, and a little more time, is needed.
5. We should continue current Fed policies more or less forever. Why not? The notion of systemic imbalances is Austrian metaphysics, so why pull the pillars out from under the temple? Let’s charge straight ahead, because at least we know the world has not blown up today.
There’s rather a lot at stake here, isn’t there?
Here is Edward Hugh on when the ECB might start to think about tapering. Johannes, we hardly knew ye!