India's top central banker criticized the Federal Reserve in two appearances in Washington on Thursday, saying that the U.S. central bank should take into consideration the impact of its monetary-easing programs on emerging economies like India's.
Raghuram Rajan, a University of Chicago economics professor before becoming governor of the Reserve Bank of India last year, said at an event at the Brookings Institution that he worries that the international impact of the Federal Reserve's program of quantitative easing and near-zero interest rates “eventually becomes unsustainable. My call is to rethink the international rules of the game.”
It’s not the first time Rajan has criticized the Fed for failing to take into consideration the effects of its policies on poorer countries.
Some emerging economies have faced falling stock prices and depreciating currencies since the Fed began moving toward slowing its bond-buying program and normalization of its monetary policy in the fall.
Rajan said Thursday that his comments were not motivated out of concern for India, which he said was “well-insulated” from the Fed’s decisions with foreign exchange reserves, but instead out of a desire to avoid a “problem of collective action.”
If Fed Chairwoman Janet Yellen and company don't consider emerging markets in their decisions, Rajan explained, those countries could react by forgoing easing themselves, building up reserves and maintaining competitive exchange rates to avoid a situation like last fall's, in which the threat of the Fed tapering its bond purchases threw emerging markets into turmoil.
In that case, Rajan warned, “we are going to go back to the global savings glut' situation that [former Fed Chairman Ben] Bernanke spoke about so eloquently before,” a reference to a 2005 speech in which Bernanke pointed to capital inflows from high-savings countries to explain low interest rates in the U.S.
Earlier in the day, Rajan had criticized the Fed for not mentioning emerging markets in its policy statements, despite assurances from Fed officials that they are sensitive to the problems that countries like India face.
Bernanke, in the audience at the Brookings event, responded that “there’s an awful lot of consultation” between the Fed and India’s central bank, referring to the 8-10 meetings that are held each year through the Bank for International Settlements, which promotes cooperation among central banks.
Bernanke dismissed the criticism, telling the Indian-born Rajan that his complaint “reflects the fact that you’re skeptical of unconventional monetary policy” such as the quantitative easing programs the Fed has undertaken in the wake of the recession.
The former Fed chairman, now a fellow at Brookings and wearing a dress shirt but no jacket, added that he wanted to take Rajan “to task” for “ignoring the money supply,” noting that strong U.S. growth promoted by easy money also would aid India’s economy.
Yellen, for her part, said in an appearance on Capitol Hill in February that the Fed has been “watching closely the recent volatility in global financial markets,” and that “these developments do not pose a substantial risk to the U.S. economic outlook.”
Bernanke said in a press conference in September that “what we’re trying to do with our monetary policy here is, I think, my colleagues in the emerging markets recognize, is trying to create a stronger U.S. economy.”