Is there an urgent need for a coordinated global monetary policy?

The Group of 20 (G-20) Finance Ministers meetings are scheduled to take place this weekend in Sydney, Australia where the top of most monetary chiefs, and finance ministers’ agendas will be how to deal with the eventual withdrawal of monetary stimulus, most notably those coming from the decisions made by the US Federal Reserve as it starts to initiate the so-called tapering measures aimed at reducing its monetary flows in the financial system in response to an increasingly improvement in the economic outlook of the United States since the end of the Global Financial Crisis in 2008-2009.

The recent winding down of monetary stimulus measures initiated by the US Fed has resulted in several bouts of emerging markets selloffs since the second half of 2013 when former US Fed Chairman, Mr. Ben Bernanke, first announced back in May 2013 that the US Federal Reserve is prepared to start dialling back its so-called ‘punch bowl’ monetary stimulus measures by September 2013 during its regular US Fed open market committee meetings. Although that announcement never came, but May 2013 was regarded as one the major turning points where emerging markets such as Indonesia, and India started to feel the effects of the massive withdrawals of the carry trades made previously during the height of the two rounds of monetary injections by the US Fed since the end of 2009.

The debates over the role of the US Federal Reserve, and the consequences of its monetary withdrawal actions are quite intense, with Reserve Bank of India (RBI) Governor, Mr. Raghuram Rajan first sounded his thoughts on the recent emerging market turmoil last month during an interview with Bloomberg Television, followed by recent comments made by Australia’s Treasurer, Mr. Joe Hockey in the lead-up to this weekend’s G-20 Finance Ministers Meetings. International Monetary Fund’s (IMF) Managing Director, Ms. Christine Lagarde, has also warned about the consequences of US Fed’s monetary actions and its impacts on the stability of the many emerging market economies, including Russia, Latin America, Turkey, and many others. The IMF is still keeping its global economic targets for 2014 to be approximately 3.7 percent.

The current US congressional mandate on the US Federal Reserve has been for the institution to develop monetary policies that focus on achieving stable inflationary and employment growth in the United States. However, that mandate appears to have been overridden by an increasingly globalised world where monetary actions/decisions made by the top global economic power like the United States will have significant impacts to the state of the global economy. Both of US Federal Reserve and the US Treasury Department have been criticised recently for failing to take into account their monetary stimulus and subsequent withdrawal measures. However, at this time, the US Federal Reserve could only abide with the US congressional mandate, and unable to alter the policy goals unless there has been a material change in the US congressional mandate. Despite the inability to override the US Government mandates, emerging market countries such as Turkey, India, and Indonesia, have not been keeping up with the consequences of intense monetary withdrawal measures by adopting draconian fiscal and monetary policies which seeks to eliminate or at least reduce the amount of debt as a percentage of overall Gross Domestic Product (GDP) present in the monetary systems. The criticisms made recently by several individuals, especially those coming from many emerging markets finance ministers should not be taken as excuses to defer urgent fiscal/monetary austerity measures to cope with the after impacts of the US Fed’s eventual completion of its ongoing tapering of its monetary policy actions by end December 2014.

The other topics to be covered in this weekend’s G-20 Finance Minsters include the ongoing negotiations of the Trans Pacific Partnership (TPP) agreement, financial regulation, and increased cooperation among its members. Some parts of the G-20 draft communique, as reported by a Feb 21 Bloomberg News article have already been released through the news wires, and one of the major discussions was still the debate over the US Federal Reserve role in ensuring that its monetary policy actions seek to minimise the fallouts of capital flight coming from emerging market economies. The US delegation led by US Treasury Secretary, Mr. Jack Lew might be facing quite an intense atmosphere during the G-20 talks, and it is hoped that there is a common understanding over the role of the US Federal Reserve as the year progresses.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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