RPT-FED FOCUS-World central bank? Uneasy role for ultra-easy Fed

(Repeats Thursday story. No changes to text)

By Pedro Nicolaci da Costa

JACKSON HOLE, Wyoming, Aug 27 (BestGrowthStock) – Federal Reserve
officials gathered at this quiet mountain resort may hear some
noise from their international counterparts about side-effects
of the central bank’s ultra-loose monetary policy.

In Japan, there is growing fear a rallying yen, whose fate
has been closely linked to the prospect of fresh stimulus by
the Fed and diminished returns on U.S. securities, will put a
damper on the country’s already soft recovery.

Officials in emerging markets also have qualms about the
Fed’s policy, if for different reasons.

Currencies in Latin America have surged, raising worries
about the cost of local exports and the chance that speculative
investments flooding countries like Brazil, Chile and Peru,
create the potential for a sharp reversal.

Chile’s finance minister complained that the peso’s
appreciation of nearly 7 percent against the dollar since early
July would be hard to stop given the U.S. backdrop.

“If… the U.S. economy is growing weakly and there are no
expectations of a rise in (U.S.) rates, it is very difficult to
battle against that,” Felipe Larrain said earlier this month,
adding that rising prices for Chile’s main export, copper, also
contributed to the country’s currency surge.

Of course, the Fed’s mandate is to support maximum
sustainable employment and stable prices in the United States,
not to fret over the effects of its policies on other nations.

“The Fed is going to concentrate on helping the domestic
economy,” said Dana Saporta, economist at Credit Suisse. “The
knock-on effects on other countries are a secondary concern.”

That may be so, but in highly interconnected financial
markets, it becomes difficult to isolate the two.

“There is a very strong correlation between interest rate
differentials and dollar/yen,” said Steven Englander, a
currency strategist at Citigroup.

Not that this is the only factor. Risk-aversion in markets
has also benefited the yen. Similarly, it would not be in the
interests of Japan nor Latin America to see the U.S. recovery
stall.

“The main concern everyone has is a double-dip recession in
developed economies,” said Jeff Grills, co-head of emerging
market debt portfolios at Gramercy in Greenwich, Connecticut.

SYMPATHY FROM LONE DISSENTER

Nations indirectly affected by Fed policy may get some
sympathy from host of the Jackson Hole symposium, Kansas City
Fed President Thomas Hoenig, who has dissented at every one of
the Fed’s policy meetings this year.

He has argued that by keeping interest rates too low for
too long, policymakers run the risk of stoking financial
bubbles in unexpected places.

But the rest of the powerful Federal Open Market Committee
will be harder to win over.

Bernanke has made clear in the past that he sees his job as
doing what is optimal for the U.S. economy.

And with the Fed missing the target on both sides of its
mandate — unemployment stands at an elevated 9.5 percent and
core inflation at an uncomfortably low 0.9 percent — the
prospect of further easing looks increasingly plausible, even
if there are doubts about its effectiveness.

U.S. data out this week showed things are getting worse.
Housing figures were terrible across the board, raising
concerns about a new home price slump in the absence of a
recently expired home-buyer tax credit.

Durable goods orders were no better, and prompted JP Morgan
to predict third-quarter growth domestic product might come in
below a 1 percent annualized rate.
http://link.reuters.com/zak27n http://link.reuters.com/nut27n

COMFORTABLY UNORTHODOX

If the trend continues, the Fed could attempt to buy up
more Treasuries to push down long-term rates.

Despite some signs of internal dissent, Bernanke remains
the definitive leading voice in the committee, and he is
unlikely to hesitate in taking further action if the economy
looks set to contract.

Earlier this month, the Fed announced it would begin using
the proceeds from maturing mortgage bonds in its portfolio to
buy Treasury notes in such a way as to keep outstanding credit
to the banking system steady at just over $2 trillion.

Is it possible that the Japanese authorities, which have a
long record of mutual respect and cooperation with the Fed,
might help dissuade the central bank from further action?
Probably not. If push comes to shove, the Fed will step in and
provide more stimulus, say analysts and investors.

During a chat with reporters in Rogers, Arkansas last week,
St. Louis Fed President James Bullard dismissed the notion that
a zero benchmark rate meant the central bank was anywhere near
out of bullets on policy.

Bernanke’s famous 2002 speech, “Deflation: Making Sure ‘It’
Doesn’t Happen Here,” suggests he feels the same way.

Ironically, it is Japan’s experience of deflation that most
vividly reminds Fed officials of the difficulties of using
monetary policy to battle a persistent and vicious cycle of
falling prices. It’s a rut the Fed would rather not slip into,
but one that appears uncomfortably possible.

(Additional reporting by Simon Gardner in Santiago, Chile
and Daniel Bases in New York)

RPT-FED FOCUS-World central bank? Uneasy role for ultra-easy Fed