Keeping its house in order in continued pursuit of its dual mandate of maximizing employment and stabilizing prices is the best thing the Federal Reserve can do, for both the U.S. and the global economy at large, as a sustainable recovery materializes, a member of the Federal Reserve Board – and possibly the next chairman – told a group meeting in Washington Thursday.
Jerome Powell, speaking to the 2017 Annual Membership Meeting of the Institute of International Finance, also pointed out that the Fed’s “policy normalization” is occurring not in isolation, but in the “context of a solid U.S. economic recovery, which should benefit all economies around the world.”
Powell, currently serving a term set to end in 2028, has lately been mentioned as a candidate in President Donald Trump’s search for a success to Board Chairman Janet Yellen, whose term at the helm ends in February. Powell joined the board in 2012.
In his remarks, Powell focused on emerging market economies (EMEs) around the world. “I am pleased to note that there have been signs lately that a sustainable global recovery may finally be materializing,” Powell said.
He called that good news, but cautioned that significant risks and uncertainties remain. “One important question is how the emerging market economies will fare as global monetary conditions normalize,” he said. “In our intertwined world, prospects for these economies are a significant driver of prospects for the United States and other advanced economies.”
He noted that, in his view, EMEs are likely to manage normalization “reasonably well,” and that capital flows have been moving in line with market fundamentals.
“Although, EME vulnerabilities have been rising, they are still well below the levels of the crisis-prone years of the 1980s and 1990s,” he said. “Global monetary conditions are expected to normalize only gradually, as the Federal Reserve and other advanced-economy central banks continue to stress clear communication and transparency.
He pointed out that the reaction of EME financial markets “so far has been benign.” But, he added, significant risks of more adverse scenarios remain. “The corporate debt situation in EMEs has been worsening, particularly in China, and market reactions to even small surprises can be unpredictable and outsized.”