Fed's Yellen: Low U.S. rates stimulatory for China
Mon Feb 8, 2010 1:18pm EST
CHICAGO, Feb 8 (Reuters) - The U.S. Federal Reserve's ultra-easy monetary policy is fueling concerns in Hong Kong and China over asset bubbles and prospects for dollar weakness, which could hurt their dollar-denominated investments, a top Federal Reserve official said on Monday.
Bonds
China, however, could adjust its exchange rate to allay inflationary worries, San Francisco Fed President Janet Yellen said in an Economic Letter.
"Because both the Chinese and Hong Kong economies are further along in their recovery phases than the U.S. economy, current U.S. monetary policy is likely to be excessively stimulatory," Yellen said in the letter. "However, as both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery."
Still, China's currency peg is less rigid than Hong Kong's, and prior to the crisis China had been gradually raising the exchange rate.
"In China's case, increased exchange rate flexibility could mitigate growing inflationary concerns," Yellen said.
"Most analysts with whom we met recognized that the renminbi will need to be revalued and monetary policy tightened to avoid inflation," she said.
Exchange rate adjustments are unlikely until mid-2010 because of concern about the pace of economic recovery among China's major trading partners, Yellen said.
Currency adjustments could also help steer the country away from its export-oriented growth strategy and toward a more balanced economy, she said.
Yellen's remarks were based on a fact-finding mission to Asia last November.
The Fed in December 2008 lowered its key overnight lending target between banks to near zero, and has said it will keep it there for an "extended period."
While there is concern in Hong Kong that low U.S. rates have triggered another round of real estate bubbles, "it is by no means clear" that low rates are the primary culprit, Yellen said. Many analysts believe most of the money flowing to Hong Kong real estate comes from mainland China, she said.
Policy responses to rising real estate prices have included tightening lending standards and capping loan amounts for real estate financing. Those are the types of policies that in retrospect "we ourselves probably should have used to lean against the housing bubble and protect the financial sector," Yellen said.
In China, where the financial crisis caused a sharp slowdown, the government instructed banks to increase lending, a policy that fueled infrastructure spending.
Meanwhile, China's central bank has bought dollars to keep the renminbi's value down despite continuing trade surpluses and capital inflows, swelling foreign exchange reserves to over $2.25 trillion.
Fed Chairman Ben Bernanke in December rejected the idea that low interest rates were helping to fuel speculative asset bubbles overseas.
"It's not the United States' responsibility to ensure that there are no misalignments on every economy in the world," Bernanke told a Senate banking committee then.
Yellen, who does not have a vote on the Fed's monetary policy-setting Federal Open Market Committee this year, is seen as an inflation "dove" and less inclined than some of her colleagues to raise rates quickly. (Reporting by Ann Saphir; Editing by Leslie Adler)
Mon Feb 8, 2010 1:18pm EST
CHICAGO, Feb 8 (Reuters) - The U.S. Federal Reserve's ultra-easy monetary policy is fueling concerns in Hong Kong and China over asset bubbles and prospects for dollar weakness, which could hurt their dollar-denominated investments, a top Federal Reserve official said on Monday.
Bonds
China, however, could adjust its exchange rate to allay inflationary worries, San Francisco Fed President Janet Yellen said in an Economic Letter.
"Because both the Chinese and Hong Kong economies are further along in their recovery phases than the U.S. economy, current U.S. monetary policy is likely to be excessively stimulatory," Yellen said in the letter. "However, as both Hong Kong and the mainland are currently pegging to the dollar, they are both to some extent stuck with the policy the Federal Reserve has chosen to promote recovery."
Still, China's currency peg is less rigid than Hong Kong's, and prior to the crisis China had been gradually raising the exchange rate.
"In China's case, increased exchange rate flexibility could mitigate growing inflationary concerns," Yellen said.
"Most analysts with whom we met recognized that the renminbi will need to be revalued and monetary policy tightened to avoid inflation," she said.
Exchange rate adjustments are unlikely until mid-2010 because of concern about the pace of economic recovery among China's major trading partners, Yellen said.
Currency adjustments could also help steer the country away from its export-oriented growth strategy and toward a more balanced economy, she said.
Yellen's remarks were based on a fact-finding mission to Asia last November.
The Fed in December 2008 lowered its key overnight lending target between banks to near zero, and has said it will keep it there for an "extended period."
While there is concern in Hong Kong that low U.S. rates have triggered another round of real estate bubbles, "it is by no means clear" that low rates are the primary culprit, Yellen said. Many analysts believe most of the money flowing to Hong Kong real estate comes from mainland China, she said.
Policy responses to rising real estate prices have included tightening lending standards and capping loan amounts for real estate financing. Those are the types of policies that in retrospect "we ourselves probably should have used to lean against the housing bubble and protect the financial sector," Yellen said.
In China, where the financial crisis caused a sharp slowdown, the government instructed banks to increase lending, a policy that fueled infrastructure spending.
Meanwhile, China's central bank has bought dollars to keep the renminbi's value down despite continuing trade surpluses and capital inflows, swelling foreign exchange reserves to over $2.25 trillion.
Fed Chairman Ben Bernanke in December rejected the idea that low interest rates were helping to fuel speculative asset bubbles overseas.
"It's not the United States' responsibility to ensure that there are no misalignments on every economy in the world," Bernanke told a Senate banking committee then.
Yellen, who does not have a vote on the Fed's monetary policy-setting Federal Open Market Committee this year, is seen as an inflation "dove" and less inclined than some of her colleagues to raise rates quickly. (Reporting by Ann Saphir; Editing by Leslie Adler)