Janet Yellen’s nomination to lead the U.S. Federal Reserve may signal a reprieve for Asian economies including China and South Korea from any immediate reduction of stimulus that could roil markets and capital flows.
South Korea said it expects Yellen will “consider well” the effects on other nations of reducing U.S. bond-buying, while Koichi Hamada, an adviser to Japanese Prime Minister Shinzo Abe, predicted the new chairman won’t rush to exit monetary easing. HSBC Holdings Plc said her nomination gives Asian policy makers time to prepare for an eventual increase in U.S. interest rates.
Asia is grappling with Fed policy shifts and the Group of 20 economies plans to identify market turmoil from central banks’ stimulus withdrawal as a key risk to the global financial system. Emerging-market stocks plunged in May when Chairman Ben S. Bernanke signaled that record easing may be pared, then rebounded when the Fed maintained stimulus last month.
“If the Federal Reserve pulls out the rug underneath Asian markets, it could clearly lead to some nasty repercussions,” said Frederic Neumann, HSBC’s co-head of Asian economics in Hong Kong. “But Yellen is seen as somebody who might withdraw stimulus only gradually and that buys Asian policy makers time to build up the defenses for the day when U.S. interest rates do begin to rise.”
U.S. President Barack Obama will announce the nomination at 3 p.m. in Washington on Oct. 9, a White House official said in an e-mailed statement. If confirmed by the Senate, Yellen, 67, would succeed Bernanke, 59, whose second four-year term ends in January.
“She has rich experience and an impressive resume as a policy maker,” Choi Hee Nam, director general of the South Korea finance ministry’s international finance bureau, said by phone from Sejong today. “I expect her to consider well the ripple effects on other countries” from policy decisions such as altering the Fed’s bond-buying program, Choi said.
Philippine Finance Secretary Cesar Purisima said in a mobile-phone message that Yellen’s nomination signals stability, policy continuity and a “steady course for the Fed.”
No comment was immediately available from the Bank of Japan. China’s central bank and Ministry of Foreign Affairs didn’t immediately respond to requests for comment.
Cao Yongfu, a researcher who follows U.S. economic policy for the government-run Chinese Academy of Social Sciences, said Yellen’s nomination will help sooth China’s short-term concerns that an immediate tapering of Fed bond-buying would cause volatility in capital flows.
Even so, prolonged easing under Yellen may result in dollar depreciation and undermine the value of China’s foreign exchange reserves, Cao said. “Yellen’s big challenge will be to shift Fed policies back to normal from an ultra-loose stance — you can’t always keep your foot on the gas.”
Yellen won the nomination after former Treasury secretary and White House economic adviser Lawrence Summers withdrew from consideration when Democrats on the Senate Banking Committee expressed opposition to his candidacy.
As the Fed’s No. 2 official, she has articulated the case for maintaining highly accommodative monetary policy. In a series of 2012 speeches, she outlined why interest rates could remain near zero into late 2015, and in a 2011 speech she justified the Fed’s first two rounds of large-scale asset purchases with an estimate that the programs would create 3 million jobs.
Yellen isn’t among the Fed policy makers who have pressed this year to pare back asset purchases, a group that includes Esther George, president of the Federal Reserve Bank of Kansas City, Jeffrey Lacker of Richmond, Richard Fisher of Dallas and Charles Plosser of Philadelphia.
“I assume Yellen’s nomination means QE for longer and the exit of QE is likely to be gentle,” said Dong Tao, head of Asia economics excluding Japan at Credit Suisse Group AG in Hong Kong. “That would be good news for China,” which is having difficulty maintaining growth momentum just as the “tides of global money printing” may start to turn, Tao said.
Hamada, a retired Yale University professor who advises Abe on monetary policy, said Yellen is “more likely to seek a way to make an economic recovery certain by keeping policy accommodative.” If prospects of an exit weaken, that may put pressure on the yen to strengthen, which risks harm to Japan’s economy and would boost the need for the BOJ to act, said Hamada, who doesn’t speak for the government.
At the same time, Hamada said he would “very much welcome” Yellen’s appointment. “She has long experience in central bank policy and she understands the role of monetary policy in the macro economy. She is the most appropriate person to lead the Fed.”
A Bloomberg Global Poll last month of investors, analysts and traders, conducted before Summers’s withdrawal, found 47 percent saying Yellen would preside over the same policy as Bernanke, with 17 percent saying it would be looser and 8 percent seeing tighter conditions. Thirty-five percent said Summers would provide less stimulus than Bernanke.
Yellen has been vice chairman of the Fed in Washington since 2010, helping to craft bond-buying and communication policies. As president of the Federal Reserve Bank of San Francisco in the six previous years, she monitored Asia and oversaw banks with foreign exposure, including Wells Fargo & Co.
Her Fed calendars, obtained under the Freedom of Information Act, show her attending meetings of counterparts and regulators in London, Paris, Zurich, Basel, Bern, Helsinki, Mexico City, Tokyo and Shanghai from 2011 to January of this year. In the 1970s, Yellen worked in the Fed’s international division and also taught at the London School of Economics.
“Asian policy makers see the U.S. as a source of instability to financial markets right now and any news that reduces that will be greeted favorably,” said Tim Condon, head of Asia research at ING Groep NV in Singapore. “They should get a little bit of a warm glow from this.”
Condon was referring both to the U.S. resolving the Fed succession and to Yellen being seen as offering policy continuity.
“It’s a good outcome for Asian economies,” said Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors Ltd. in Sydney, which oversees about A$131 billion ($124 billion). Yellen “will ensure steady continuation at the Fed, rather than an abrupt change in policy which could threaten U.S. or global growth,” Oliver said.
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