Central banks in Europe, the United States and Japan have no need to rush to exit the ultra-easy monetary policies they have put in place to spur growth, IMF Managing Director Christine Lagarde said on Friday.
But in prepared remarks at the U.S. Federal Reserve’s annual Jackson Hole policy symposium, she also said that central banks must work with each other to minimize spillover from any withdrawal of policy accommodation that could stifle world growth.
“Policies and policy coordination are not yet where they need to be. Failing to act at the global level, with each country playing its part, could put the global recovery at risk,” she said.
Central bankers from around the world are attending the annual conference hosted by the Kansas City Federal Reserve Bank in the mountainous splendor of Wyoming’s Grand Teton National Park.
Lagarde, speaking during lunch on the first day of the two-day gathering, noted that concerns about the Fed withdrawing its support had knocked emerging markets in recent days. But she said the exit would proceed more slowly than “feared.”
“I do not suggest a rush to the exit. UMP (unconventional monetary policy) is still needed in all places it is being used, albeit longer for some than for others. In Europe, for example, there is a good deal more mileage to be gained from UMP. In Japan too, exit is very likely some way off.”
The Fed expects to being scaling back monthly purchases of bonds later this year. But in June it set off violent swings in global financial markets by just talking about tapering its campaign of so-called quantitative easing.
However, Lagarde said there was no reason central banks could not manage this exit with the same success they had when they launched unconventional policies amid the financial crisis.
These include forward interest rate guidance and quantitative easing, adopted after banks lowered rates nearly to zero to shelter their economies from a severe recession sparked by the collapse of a bubble in the U.S. housing market.
The measures have been controversial, with critics, including some U.S. lawmakers, castigating the Fed for measures that could lead to further bubbles or future inflation.
But Lagarde said the steps had clearly worked for both the countries putting them in place and for other nations that benefited from the global recovery that these actions delivered.
That said, as the Fed, European Central Bank and Bank of Japan begin to normalize policies, emerging economies that have experienced massive capital inflows as a byproduct of their ultra-low interest rates will have to take steps to prepare.
“Exchange rate flexibility will help, but not at all cost. Some market intervention may help moderate exchange rate volatility or short-term liquidity pressures,” she said.
Turkey and India have both announced foreign exchange measures after their currencies fell sharply this week, and there has been talk that the top emerging economies could set up currency swap lines to protect others from speculative attack.
Lagarde pointedly said that swap lines “can help” defend emerging markets from exit spillovers, and pledged that the IMF was ready to help with advice, and money, if needed.
“For the Fund’s part, we stand ready to provide policy advice and financial support, including on a precautionary basis, through our various instruments,” she said.