–Expect Long-Term To Decline By Approx. 20 Bps Due To Operation Twist
By Brai Odion-Esene
WASHINGTON (MNI) – Federal Reserve Chairman Ben Bernanke Tuesday
said China’s fixed exchange rate regime is contributing to the sluggish
pace of the global economic recovery, providing more ammunition to those
pushing for stronger action by the U.S. government against the world’s
second largest economy.
In response to questions from lawmakers during a testimony before
the Joint Economic Committee, Bernanke noted that research by the
International Monetary Fund and other international bodies have found
that the yuan remains undervalued by a significant amount, and that
there are many direct as well as indirect effects of China’s exchange
rate policy on the global economy.
“I think right now a concern is that the Chinese currency policy is
blocking what might be a more normal recovery process in the global
economy,” Bernanke said.
He added, “In particular we have now a two-speed recovery where
advanced industrial countries — like the United States and Europe —
are growing very, very slowly, where emerging market economies are
growing quite quickly.”
Bernanke said while a more normal recovery would have some more
demand being shifted away from emerging markets towards the industrial
economies, “the Chinese currency policy is blocking that process, so it
is — to some extent — hurting the recovery process.”
The U.S. Senate Monday evening voted to formally begin debate on
its China currency bill. The legislation would automatically threaten
economic sanctions if the U.S. Treasury finds that a trading partner’s
currency is “misaligned” due to intentional policy actions of a
government.
Turning to monetary policy, the Federal Open Market Committee
decided to implement the $400 billion ‘Operation Twist’ program to put
downward pressure on long-term interest rates. When asked how much of a
decline in long-term interest rates he expected, Bernanke said the
central bank expects a drop in the region of 20 basis points.
“We see this as being something approximately equal to something
like a 50 basis point cut in the federal funds rate,” he said. “In that
respect it’s a significant step but not a game changer.”
As for the hoped for economic boost, Bernanke said the FOMC
believes the program provides a meaningful, but not an enormous, support
to the economy. It should help “somewhat” on job creation and growth, he
added.
“It’s particularly important now that the recovery is close to
faltering,” Bernanke said. “We need to make sure that the recovery
continues and doesn’t drop back.”
He warned, however, that the Fed’s actions will not “radically
change” the picture but they should be helping in keeping inflation near
the price stability levels while also supporting growth.
** Market News International Washington Bureau: 202-371-2121 **
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