A top Chinese central banker expressed concern over a possible US Federal Reserve interestrate increase, while his US counterpart assured that the pace of policy normalization is "likely tobe gradual".
In an exchange of policy stance, Chen Yulu, vice-governor of People's Bank of China, expressedhis worry that a further Fed rate increase, at a time that most economies are cutting rates, mightwiden the interest rate gap and further strengthen the US dollar.
"As the dollar gets stronger, emerging economies might face mutually reinforcing currencydepreciation and capital outflow. Plunging commodity prices might compound their difficulties,"Chen said. "In a strong dollar cycle, if emerging economies didn't handle their foreign debt-incurred risks well, it could trigger financial turbulence in certain emerging economies, or even aregional financial crisis."
In the same forum－the People's Bank of China-Federal Reserve Bank of New York JointSymposium, in Hangzhou－Chen's counterpart, William Dudley, president of the FederalReserve Bank of New York, said that the recent financial turmoil took place a while after theFed's first rate increase in December.
"The recent episode appears to largely reflect concerns about risks emanating from emergingmarkets themselves, rather than concerns about the direction of Fed policy," he said.
He attributed recent volatility to the broad slowdown in emerging economies, credit expansion inthese economies and China's economic transition, which involves slower growth.
"Economic transitions are always difficult to manage and invariably present policymakers withunexpected challenges. It is not surprising, then, that market participants are focused on the riskthat the downshift in Chinese growth could prove to be more pronounced than anticipated," hesaid. "I want to be clear. The rebalancing process now underway in China is both necessary andappropriate, and will unfold over a period of years."
How will the Fed respond to these developments? Dudley said "foreign developments" havebeen factored into the Fed's assessment of the US outlook. The weakness in emergingeconomies and markets is one of the considerations behind the Federal Open MarketCommittee's assessment that the appropriate pace of policy normalization is "likely to begradual".
"We cannot appropriately calibrate policy without keeping these spillover and feedback effects inmind," he said.
