New York Fed President William C. Dudley, acknowledging the U.S. central bank failed to stem the credit bubble that gave rise to the 2008 financial crisis, said it has an obligation to support global stability.
“Given the dollar’s role as the global reserve currency, the Federal Reserve has a special responsibility to manage U.S. monetary policy in a way that helps promote global financial stability,” Dudley said in prepared remarks in Paris. “Our actions have global implications that feed back into the U.S. economy and financial markets.”
The Fed is likely to raise its benchmark interest rate some time next year, a shift that will “undoubtedly be accompanied by some degree of market turbulence” Dudley said. The Fed has kept the rate near zero since December 2008.
While “adjustment will sometimes be difficult” for emerging markets, he said, getting policy right in the U.S. is the best way to minimize global fallout.
“The largest problems that countries create for others often emanate from getting policy wrong domestically,” Dudley said. “Recession or instability at home is often quickly exported.”
In stressing the importance of promoting financial stability, Dudley acknowledged the Fed’s failure to stem the mortgage crisis.
“We failed to act both early enough and decisively enough to stem the credit excesses that spawned the financial crisis and the Great Recession,” he said in remarks to a panel at a Bank of France event. “The U.S. was not alone in this shortcoming, but given our position in the global financial system, we especially should have done better.”
Taper Tantrum
Dudley pointed to last year’s so-called taper tantrum, when then-Chairman Ben S. Bernanke unexpectedly signaled that the Fed could soon start reducing bond purchases, as an example of the global impact of Fed actions.
“For most of us, the market volatility that we saw during the so-called ’taper tantrum’ in the spring and summer of 2013 still remains fresh in our minds,” he said. “It is clear in retrospect that our attempts in the spring of 2013 to provide guidance about the potential timing and pace of tapering confused market participants.”
Still, the New York Fed chief said the most important way to limit global spillovers was to focus on fulfilling domestic mandates and promoting sustainable economic growth.
Dudley said that emerging markets “generally appear to be better equipped today to handle the Fed’s prospective exit from its exceptional policy accommodation than they were in past tightening cycles.”
Among the reasons for optimism, he cited moderate levels of external debt, larger foreign reserves, stronger banking systems and the absence of pegged exchange rates.