The delicate task ahead for the Federal Reserve and other central banks is deciding when to start boosting interest rates and reeling in all the stimulus pumped out during the global financial crisis, Fed Chairman Ben S. Bernanke said Sunday.
Mr. Bernanke, however, didn’t provide any new clues on that front.
As is typically the case in the early stages of an economic recovery, central bank officials “will have to weigh the risks of a premature exit against those of leaving expansionary policy in place for too long,” Mr. Bernanke said in prepared remarks to a conference sponsored by the Bank of Korea in Seoul.
The Fed chief’s remarks were prerecorded and delivered via video link.
Tightening credit too soon risks short-circuiting countries’ economic recoveries. Waiting too long could risk unleashing inflation and sparking a dangerous new wave of speculation like the one that powered the housing boom and its devastating bust.
Because economic conditions vary country to country, the appropriate time to start tightening credit varies, too, Mr. Bernanke said. “To guide these important decisions, each central bank will have to carefully monitor economic developments in its own jurisdiction,” he said.
In the United States, the Fed has held a key interest rate at a record low near zero since December 2008. Just last month, he repeated a pledge to hold rates at superlow levels for an “extended period” to nurture the fledging recovery.
Fears that a spreading debt crisis in Europe could hurt the U.S. recovery are prompting some economists to predict the Fed will be on the sidelines for longer than anticipated. A growing number of economists now think the Fed will hold rates at record lows - well into next year, or perhaps into 2012. Just a month ago, many had thought the Fed would start raising rates near the end of this year.
Under the leadership of its new governor, Kim Choong-soo, the Bank of Korea last month also left its key interest rate at a record low of 2 percent. Mr. Kim and other BOK policymakers must eventually decide when South Korea’s economic recovery is strong enough to withstand higher borrowing costs.
G-20 finance ministers will meet in Busan, South Korea, later this week with talks likely to be dominated by the continued fallout from the global crisis.
In his speech Monday, Mr. Bernanke called for the Group of 20 world powers to engage on “extensive international cooperation” on financial reforms in a bid to strengthen the global economy.
“On a global level, the leadership of the … G-20 - which Korea is currently chairing - will be essential in ensuring that reforms are not only strong and effective but also consistent and coordinated across countries,” he said.
The U.S. Congress is moving closer to a final deal on a financial reform bill. And other governments worldwide are drawing up new measures to curb the excesses of financial institutions blamed for pushing many economies to the brink. But critics say national efforts will be largely ineffective in an age when banks and investment houses can make cross-border trades in a fraction of a second.
“Strengthening the international financial system and ensuring that financial institutions are carefully regulated, well capitalized, liquid, and transparent will require extensive international cooperation,” Mr. Bernanke said.
G-20 ministers will also grapple with the ongoing European debt crisis, which has called into question the strength of the global economic recovery. G-20 leaders will meet in Canada in late June.
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