Global anger mounts at 'clueless' Fed actions
November 6, 2010

Global anger at a fresh round of liquidity injections into the US economy swelled on Friday as Germany called the move "clueless" and emerging nations protested that it will wreak havoc on them.

Harsh criticism poured in as President Barack Obama headed for Asia on a trip he had hoped to use as a springboard for pressuring China to revalue its yuan but may end up in a fractious Group of 20 leaders summit next week.

The United States has been pressing China, largely unsuccessfully, to let its yuan currency rise more quickly to reflect the strength of what is now the world's second-largest economy and help correct global trade imbalances.

The Federal Reserve's decision this week to buy $US600 billion ($591 billion) in long-term bonds with new money to try to revive the flagging US economy have increased fears of more money pouring across borders in search of better returns.

China landed its own blows by saying a US proposal for numerical targets for surpluses and deficits - akin to a range for yuan appreciation - smacked of outmoded central planning that won't win any friends for the United States.

Chinese Vice-Foreign Minister Cui Tiankai, who is China's chief G20 negotiator, told a news briefing that he was also worried at the prospect of a flood of money pouring into global markets in search of higher yields.

"They owe us some explanation," Cui said. "I've seen much concern about the impact of this policy on financial stability in other countries."

Fed liquidity creating problems in other countries

A "common theme" is emerging that "excess liquidity in the US is creating problems in other countries," Brazil's Central Bank Governor Henrique Meirelles told reporters in Chicago.

Resentment abroad stems from worry that Fed pump-priming will hasten the US dollar's slide and cause their currencies to shoot up in value, setting the stage for asset bubbles and making a future burst of inflation more likely.

"With all due respect, US policy is clueless," German Finance Minister Wolfgang Schaeuble told a conference.

"(The problem) is not a shortage of liquidity. It's not that the Americans haven't pumped enough liquidity into the market, and now to say let's pump more into the market is not going to solve their problems."

Fed Chairman Ben Bernanke, speaking to students in Florida, seized the opportunity to defend the move by saying "a strong US economy, a recovering economy, is critical, not just for Americans but it's also critical for the global economy."

New US unemployment figures on Friday, showing a surprisingly strong 151,000 jobs were created in October, caused some analysts to question whether the Federal Reserve's pledge to buy up to $US600 billion of Treasury securities was even necessary.

But with a jobless rate stuck at 9.6 per cent, few doubted the Fed will proceed with buying.

German Chancellor Angela Merkel will address US policy in Group of 20 discussions on exchange rates, a government source said, adding that she shared Schaeuble's criticism.

Policymakers from the world's new economic powerhouses in Latin America and Asia have said they would consider fresh steps to curb capital inflows after the Fed's move.

South African Finance Minister Pravin Gordhan said Fed policy "undermines the spirit of multilateral cooperation" that the G20 had sought to achieve. The money will find its way into financial markets of emerging nations with potentially devastating impact on their exports, he charged.

Zhou Xiaochuan, China's central bank governor, said while Beijing could understand that the Fed was implementing more monetary easing in order to stimulate US recovery, it may not be a good policy for the global economy.

Before he left on an Asian trip that will take him to the G20 gathering next week, President Barack Obama said a dramatically realigned political landscape in the United States called for cooperation at home because US global economic leadership was at stake.

"We can't spend the next two years mired in gridlock," Obama said in a reference to the outcome of mid-term elections that put Republicans in control of the US House of representatives. "Other countries, like China, aren't standing still. So we can't stand still either."

No balance

Efforts to reduce imbalances that are destabilizing the global economy will top the agenda of the November 11-12 summit of the Group of 20 forum of leading economies in Seoul.

China and Germany oppose a plan floated by US Treasury Secretary Timothy Geithner last month to cap current account surpluses and deficits at 4 per cent of gross domestic product.

"Of course, we hope to see more balanced current accounts," Chinese Vice-Foreign Minister Cui Tiankai told a news briefing. "But we believe it would not be a good approach to single out this issue and focus all attention on it. The artificial setting of a numerical target cannot but remind us of the days of planned economies."

Cui, China's chief G20 negotiator, also rejected any attempt to set target ranges for the yuan to appreciate.

"That would indeed be asking us to manipulate the ... exchange rate, and it is something that we will of course not do," Cui said.

The Asia-Pacific Economic Cooperation (APEC) forum in Kyoto, which Geithner will attend, will also provide an opportunity for emerging economies to voice their views of the Fed's action.

Reuters