S&P economist praises US Federal Reserve’s bold post-2008 policies

America's central bank earns plaudits for its "bold" policies since the global financial crisis. Paul Sheard, Standard & Poor’s New York-based chief global economist, speaks to The National.

Paul Sheard, Standard & Poor’s New York-based chief global economist, says the US Federal Reserve would likely start to taper its US$85 billion per month bond purchases in December.  Antonie Roberston / The National
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The global economy has come out of the financial crisis of 2008 in good shape, with bold central banks like America's Federal Reserve keeping interest rates low and buying bonds and other securities to stave off a rerun of the Great Depression, according to Paul Sheard, Standard & Poor's New York-based chief global economist, who spoke to The Nationalyesterday.
Global economic growth will be led by China and the United States, he says, and emerging markets are unlikely to take the hammering many predict when the Fed begins to cut back on its monetary stimulus programme.
When do you think the Fed will start to taper its US$85 billion per month bond purchases?
The most likely timing in our view of the beginning of tapering for want of a better word, would probably be December. We never really thought it would be the beginning of September. So we weren't really surprised by that. We're still sticking to probably beginning in December but pushed into next year. I wouldn't say that this is a big fuss about nothing, but I would say that there is a sense that everyone has become obsessed about tapering. And I think it's losing sight of the bigger picture, which is a Fed focused on achieving its objectives. Obviously the primary mandate is price stability and maximum employment, which essentially means getting the economy back to full operating capacity as soon as possible. That's the job of the central bank. If you look at the Fed since 2008, the Fed has consistently been extremely proactive, innovative, activist central bank.
Have the US central bank's policies been effective?
The policies are working to a certain extent, the unemployment rate continues to come down. There is improvement in the labour market. It hasn't quite reached the threshold of the Fed saying that this has substantially improved, but there has been some measure of improvement. The Fed has been moving to start to signal, forward guidance, to make their monetary policy path as transparent as possible. They have signalled that by the end of the year they should start tapering that $85bn. The important thing to realise there is that even if they taper that $85bn to $75bn, $70bn, $50bn, whatever, that still means that the Fed is expanding its balance sheet.
What will happen to emerging market economies when the Fed does taper, given the sell-offs in emerging market equities earlier in the year on concerns of the Fed reducing its stimulus?
I don't think very much is going to happen. Fundamentally the emerging markets have good fundamentals. That's why they are emerging markets, some better than others. If the biggest economy in the world, the US economy is getting a stronger and stronger recovery, that's a positive for those emerging markets. I don't see the big problem here. You have certain economies like India and Indonesia, for example, which are running current-account deficits. They have to finance their growth with capital flows. That capital is not as readily available as it was in the past. That would be a trigger for domestic policymakers to get focused on the necessary structural reforms and making sure that the domestic policies are good. There will be consequences. Some countries will have more difficult situations than others. But fundamentally the fact is that the Fed has signalled well in advance what it's going to do and what it's conditional on. I don't think this is going to be fundamentally destabilising for emerging markets.
Which regions will show the best economic performance in the coming years?
If you look at the global economy as a whole, the picture of the next few years will be like the picture of the last few years, which is that the most dynamic region is emerging Asia – China, South East Asia, India. They've been the fastest-growing economies. That will probably continue to be the case. You can't expect the US to grow more than 2 to 2.5 per cent on a stable basis. Just by definition, emerging markets have the most growth potential. The fastest growing economy has been China. We expect China to grow at the low 7s for the next two to three years. That's the most significant driver of global growth. China is really a linchpin of the global economy. You put the US and China together, you have a big chunk of the global economy. That's a good pair of linchpins for the global economy. Indonesia, India and some of the smaller economies have the potential to grow, 5, 7 to 8 per cent depending on the state of the global economy.
mkassem@thenational.ae