:00:00. > :00:07.Now on BBC News Talking Business with Linda Yueh.
:00:08. > :00:10.It's a new era at the Federal Reserve with a woman in charge for
:00:11. > :00:15.the first time. The end of the era of cheap money has rattled global
:00:16. > :00:23.markets. Will Janet Yellen be able to orchestrate a smooth unwinding of
:00:24. > :00:36.the Fed's programme? What is the state of the US economy? I'm Linda
:00:37. > :00:48.Yueh with Talking Business from Washington DC.
:00:49. > :00:54.A warm welcome to the programme. It's a new era at the Fed in more
:00:55. > :00:59.ways than one. There is a new chair, Janet Yellen, who takes the helm,
:01:00. > :01:07.global markets are in turmoil as the Fed unwinds its cash stimulus
:01:08. > :01:12.programme. I want to go and take a look at what this new era could
:01:13. > :01:17.involve. There have been many different ways of handling the
:01:18. > :01:22.economy. But always one common denominator - there was a man in
:01:23. > :01:28.charge. But that's changing. Janet Yellen is taking over. A 67-year-old
:01:29. > :01:33.former academic, moving up from the number two job at the Fed, she will
:01:34. > :01:40.present a radically different face, but not radically different policies
:01:41. > :01:46.from her predecessor, Ben Bernanke. To support the recovery, he flooded
:01:47. > :01:50.the economy with cheap cash for five years and kept rates low. Now, that
:01:51. > :01:53.the economy is getting back on track, Janet Yellen's era will be
:01:54. > :02:00.different and she has made clear what her focus will be. The mandate
:02:01. > :02:10.of the Federal Reserve is to serve all the American people. Too many
:02:11. > :02:15.Americans still can't find a job and worry how they will pay their bills.
:02:16. > :02:21.The Federal Reserve can help if it does its job effectively. That means
:02:22. > :02:25.reducing unemployment. To succeed, Janet Yellen must keep borrowing
:02:26. > :02:29.costs low until the recovery takes hold, persuading markets that the
:02:30. > :02:38.end of cash injections doesn't mean higher interest rates and that will
:02:39. > :02:43.be the challenge of her early tenure. Joining me now is Randall
:02:44. > :02:49.Kroszner. Lovely to see you. Thank you for joining us from New York.
:02:50. > :02:54.Let me start off by asking you will there be a seamless transition, or
:02:55. > :02:58.could there be some surprises in the handover between the Fed chairs? It
:02:59. > :03:04.is highly unlikely that Janet Yellen will become chair on February 1st
:03:05. > :03:08.and say, "I disagree everything that Ben made me do for the last few
:03:09. > :03:11.years." LAUGHTER She and the chairman have worked very closely
:03:12. > :03:15.together, have worked on the communication strategy, have worked
:03:16. > :03:28.on the quantitative easing strategy. So you will see a lot of continuity
:03:29. > :03:34.there. The Fed is unwinding its cash stimulus programme. Global markets
:03:35. > :03:37.are worried about it. So, what do you think are the key points we
:03:38. > :03:42.should be watching for under Janet Yellen? Certainly, the volatility
:03:43. > :03:45.that is occurring now in emerging markets, we have to see whether that
:03:46. > :03:51.is a short life phenomenon or whether it will have longer legs and
:03:52. > :03:55.lead to more potential problems internationally, international risks
:03:56. > :04:00.that could hit the US. One of the big challenges is going to be
:04:01. > :04:07.communication. The strategy that had developed, talked about an
:04:08. > :04:11.unemployment goal of 6.5%. Well, we are getting very close to 6.5% and
:04:12. > :04:17.the Fed wants to make it clear that they are not going to be reducing -
:04:18. > :04:21.increasing rates any time soon. It will become more and more difficult
:04:22. > :04:27.as the unemployment rate falls below 6.5% to be able to say well, we are
:04:28. > :04:30.keeping it long beyond 6.5%. They will have to either change the
:04:31. > :04:33.target or they will have to introduce other considerations,
:04:34. > :04:40.perhaps more of a focus on inflation where the potential for -- with the
:04:41. > :04:46.potential for deflation. There is a lot of concern about the credibility
:04:47. > :04:51.of forward guidance, given how quickly unemployment has come down.
:04:52. > :04:54.Do you think a dhapk in target -- change in target is likely, or will
:04:55. > :04:59.it be more communication rather than a change in target or new targets
:05:00. > :05:02.that will govern policy going ahead? I think ultimately, as the
:05:03. > :05:06.unemployment rate comes down - it is coming down in the US for the wrong
:05:07. > :05:09.reasons - it is not because more people are being employed but
:05:10. > :05:14.because fewer people are looking for work. The labour force participation
:05:15. > :05:18.is quite low. They have to talk about it differently. Perhaps they
:05:19. > :05:25.would move down to another number, but moving more towards some of the
:05:26. > :05:29.concerns about the very low inflation outcomes, the report we
:05:30. > :05:35.got this morning suggested inflation is still at very low levels. So,
:05:36. > :05:39.moving towards talking about some of these other issues just as much and
:05:40. > :05:47.perhaps more than the employment rate will be something that they
:05:48. > :05:51.have to pivot to. Do you think the criticism that the Fed doesn't pay
:05:52. > :05:59.enough attention to global markets is warranted? Well, a lot of the
:06:00. > :06:01.turmoil we have been seeing has been really domestic problems in
:06:02. > :06:07.different countries. People are trying to blame the Fed for what is
:06:08. > :06:15.going on in Turkey, but domestic political problems, pressures that
:06:16. > :06:20.the Central Bank had faced not to raise interest rates earlier, it is
:06:21. > :06:30.hard to say that is Ben Bernanke Oriel yell yell's fault. The -- or
:06:31. > :06:33.Janet Yellen's fault. The Fed will take into account the fragilities
:06:34. > :06:38.that are out there and the consequences of that. To say that
:06:39. > :06:44.it's directly the Fed's fault is a little bit off to say the least.
:06:45. > :06:48.That was Randall Kroszner, a former Fed governor. Joining me now to
:06:49. > :06:58.discuss the challenges facing the Fed are Adam Posen, President of the
:06:59. > :07:03.Peter son Institute, and Beth Ann Bovino, chief US economist. Welcome
:07:04. > :07:08.to both of you. Adam, I will start with you on this. We just heard
:07:09. > :07:12.Randall Kroszner talk about the domestic challenges that a lot of
:07:13. > :07:16.different countries have around the world as they face this new era. I
:07:17. > :07:21.want to come back to a bit of America's challenges. It does seem
:07:22. > :07:27.like the American economy is better - we have had a growth rate of
:07:28. > :07:34.coming out of 3.28%. This is hardly a stunning rebound. Is it the right
:07:35. > :07:38.time to be stopping the stimulus cash support? We can debate the
:07:39. > :07:42.exact forecast. That is an indicator that we are back in the realm of
:07:43. > :07:46.normal economy. There is no question of the direction the economy was
:07:47. > :07:49.unfortunately heading and therefore the direction the Fed had to be
:07:50. > :07:53.heading, which was more ease, more ease, more ease. Now it is
:07:54. > :07:57.legitimate to say well, some people - myself included - would say it is
:07:58. > :08:02.premature to tighten. But it is back to the normal life of are we getting
:08:03. > :08:06.it exactly right or not? When we talk about the strength of the US
:08:07. > :08:11.economy, it is important to remember that this 3.2% growth we saw this
:08:12. > :08:16.year is higher in the private sector. We had the fiscal follies in
:08:17. > :08:23.the US and we had the tapering talk that started in May under Chairman
:08:24. > :08:30.Ben Bernanke. The underlying growth rate is now quite strong. Do you
:08:31. > :08:34.agree, Beth Ann? I agree for the most part. I do think in terms of
:08:35. > :08:41.the strength of the US economy, I have been looking at 2013. The
:08:42. > :08:45.surprising resilience in the private sector. You are seeing
:08:46. > :08:49.manufacturing, a new change there that I don't think will go away for
:08:50. > :08:52.some time. You see energy production and the energy boom is something
:08:53. > :08:55.that will be a multi-generational impact on growth in the United
:08:56. > :09:04.States. Certainly, we do have ways to go with jobs as was pointed out.
:09:05. > :09:12.The labour market participation rate is at a 35-year low. With housing
:09:13. > :09:15.turning around and looking like it will be relatively strong for this
:09:16. > :09:19.year and the next, we will continue to see that going forward. I think,
:09:20. > :09:24.though, in terms of quantitative easing, I got the feeling they were
:09:25. > :09:29.ready to move away from it. I think that the US economy - what is really
:09:30. > :09:34.important to know is that the Fed has confidence that we can absorb
:09:35. > :09:37.this pull-back in terms of purchase or bond purchases and still continue
:09:38. > :09:41.to grow. Adam, one of the things that I see when I look at forward
:09:42. > :09:45.guidance is this attempt to say we have stopped injecting cash, but
:09:46. > :09:50.rates will stay low. Is that credible? Basically, no. I think the
:09:51. > :09:57.Bank of England just discovered this. They attempted forward
:09:58. > :10:04.guidance as well. The economy turned out better than they thought. So
:10:05. > :10:12.they gave it up. It was important, the question you posed to Randall
:10:13. > :10:18.Kroszner and his response. Do you fiddle with the target of what you
:10:19. > :10:22.announced? That doesn't do anything except add confusion. The forward
:10:23. > :10:28.guidance will be empty talk. It will be about the forecast. Where do you
:10:29. > :10:34.come out on this? When you are looking at it, do you think forward
:10:35. > :10:37.guidance is a credible policy? Are you more focussed on the individual
:10:38. > :10:45.forecast of when the first rate rises will come? Sure. What I was
:10:46. > :10:50.expecting - and I am waiting for more guidance from the Fed - they
:10:51. > :10:57.have changed the unemployment rate threshold at 6.5% and now they say -
:10:58. > :11:05.I'm sorry the interest rates will stay very low. What does that mean?
:11:06. > :11:09.I'd like more clarity on that. It seems they are not sure where to go
:11:10. > :11:13.with that. I'm concerned about forward guidance. It has been a
:11:14. > :11:18.strength. It was all they had. I'm glad it was a strength for the US
:11:19. > :11:21.economy. It did keep interest rates down significantly. However, as we
:11:22. > :11:27.get closer to that 6.5% threshold, what are they going to do. They will
:11:28. > :11:30.need to act. They will be more relying on what the individual
:11:31. > :11:35.forecasts are from the Governors and from the President. The other big
:11:36. > :11:41.issue for the US, the fiscal side. Right. How is that going to play
:11:42. > :11:49.out, Adam? Fiscal, if monetary policies no longer are as loose and
:11:50. > :11:53.fiscal tightening plays into it, what does that do? We had very tight
:11:54. > :11:58.policies. After the big stimulus at the start of 2009, we have had
:11:59. > :12:01.relatively tight policies in the federal government, quite tight
:12:02. > :12:08.policies in state and local government. Those have shifted this
:12:09. > :12:14.year. State and local government has gone to neutral. Looking ahead at
:12:15. > :12:23.the State of the Union and praying for no more budget crack-ups between
:12:24. > :12:31.Congress and the President, they should be less of a contraction.
:12:32. > :12:35.It's resulted in quite a good consolidation. It may have been done
:12:36. > :12:39.in a stupid way that raised risks. It may have cut the wrong things. If
:12:40. > :12:45.you look at the budget numbers, growth plus the non-ability to turn
:12:46. > :12:52.over taxes and spend meant that the US budget position is much stronger
:12:53. > :12:56.than it was five years ago. One of the big concerns about what the Fed
:12:57. > :13:01.is doing is that emerging economies could be plunged into crisis. Is
:13:02. > :13:08.that a possibility and a risk? I think it is possible but I do not
:13:09. > :13:12.think it is directly due to the Fed. Let's say they slowed down on
:13:13. > :13:16.tapering so you have maybe a little more inflation and growth in the US.
:13:17. > :13:21.That will not make a difference to the Turkish or the Thai Government
:13:22. > :13:25.situations, it will not make a difference to inflation in India or
:13:26. > :13:32.Argentina, fundamentally. To keep it short, ditto. I agree. I can say
:13:33. > :13:35.that I think the Fed, during their meetings they spent a lot of time
:13:36. > :13:39.talking about what is happening with emerging markets and the sell-off.
:13:40. > :13:44.They are also looking about is there a spill-over effects to US markets?
:13:45. > :13:48.Which is their mandate, to focus on what happens to jobs and rice
:13:49. > :13:52.stability. This is something they will focus on but I did not think
:13:53. > :13:56.they were going to act on what is happening abroad. Thank you to my
:13:57. > :14:01.guests. There is no question that the Fed's actions have a significant
:14:02. > :14:05.global impact, as well as on the global economy. Our emerging markets
:14:06. > :14:10.prepared for the end of the era of cheap money? Is the US economy
:14:11. > :14:16.ready? I went to two places, Jakarta in Indonesia and Maryland in the US
:14:17. > :14:22.to see the effect of the tapering of the unwinding of the Fed's stimulus.
:14:23. > :14:28.January on Maryland's Eastern Shore. Like many other places in the United
:14:29. > :14:33.States, this still lies in economic deepfreeze. Kind of take one day at
:14:34. > :14:37.a time... This man has been building and repairing boats here for over 30
:14:38. > :14:43.years. He's handing on but has had to let go of of his workers. What
:14:44. > :14:52.the Fed has done does not making optimistic. I do not really see
:14:53. > :14:56.anything that would encourage me to go out and borrow extra money to do
:14:57. > :15:03.extra things, to put extra people to work. I do not seek absolutely
:15:04. > :15:07.nothing. This small town has everything we have come to expect
:15:08. > :15:11.since the financial crisis. -employment, a lot of home
:15:12. > :15:19.foreclosures, and empty Main Street is. But things have been bad here
:15:20. > :15:24.for a long time. We can see it and we see it on TV but when you get
:15:25. > :15:28.down to us, there was a joke you used to tell around here, if we had
:15:29. > :15:33.a depression, it would take us ten years before we knew it, because we
:15:34. > :15:38.have been depressed for so long. That is kind of situation. That is a
:15:39. > :15:41.situation that has caused the Fed to pump in cash for the past five
:15:42. > :15:47.years. And now they are cutting back. Even though all of the
:15:48. > :15:51.attention is on the Fed's tapering, or cutting back, its cash
:15:52. > :15:55.injections, what matters for the fragile recovery is where interest
:15:56. > :16:01.rates are headed. Managing that will be the Fed's biggest challenge. If
:16:02. > :16:05.rates start to rise, people who are struggling could struggle more, and
:16:06. > :16:12.the recovery could be over just as it has begun. For the world economy,
:16:13. > :16:18.the Federal Reserve's actions are watched like no other. Especially in
:16:19. > :16:22.the emerging markets such as Indonesia, which are specially
:16:23. > :16:27.vulnerable. Fragile. A measure of fragility is how uncomfortably eight
:16:28. > :16:36.country can manage its debt, and Indonesia has a lot. For percent of
:16:37. > :16:40.GDP is owed to foreign creditors. It means that the burden is getting
:16:41. > :16:43.harder and harder to manage. They are hard at work in this plastic
:16:44. > :16:48.factory but this country is considered a member of the fragile
:16:49. > :16:52.five because it imports more than it exports, so it goes a lot more than
:16:53. > :16:57.it earns. Still, the Government is confident that no matter what the
:16:58. > :17:04.Fed does, investors will still think they are worth the risk. Our
:17:05. > :17:08.long-term growth is 6% or 6.5% while the US is around 3%. So in terms of
:17:09. > :17:14.growth we are offering a better return and believe the improving
:17:15. > :17:18.global economy will improve confidence of global investors to
:17:19. > :17:26.invest in a more risky country like this. The good times, cheap money,
:17:27. > :17:32.was always going to end. Emerging economies now need to convince
:17:33. > :17:37.investors to stay put. I am joined by managing director at
:17:38. > :17:44.the World Bank and the former Indonesian finance minister. It is
:17:45. > :17:49.wonderful to have you here. I recently went to your country to see
:17:50. > :17:54.the impact of the Fed's actions. Indonesia has been classed as one of
:17:55. > :17:58.the fragile five countries which are said to be at risk when the ear of
:17:59. > :18:06.cheap money ends. Do you think there is a risk to Indonesia, or is it
:18:07. > :18:14.incorrect? They look at the response to the macro and Mick indicator more
:18:15. > :18:18.than the deficit. Donations in 2008-2009 or even back in the
:18:19. > :18:23.financial crisis in 1997-98 has done a lot of good jobs in reforming
:18:24. > :18:27.their structural weaknesses, whether this is in the banking sector, in
:18:28. > :18:32.the balancing of the central bank, or even in some other area of the
:18:33. > :18:45.economy. If you look at the disco deficit, it is never actually above
:18:46. > :18:50.2%. -- fiscal deficit. So there is now confidence and that is exactly
:18:51. > :18:54.why they group Indonesia with the others like turkey or even South
:18:55. > :19:00.Africa and Brazil. Looking at this country is much more widely,
:19:01. > :19:04.emerging economies have had quite a roller-coaster ride. They did very
:19:05. > :19:09.well 2008 for the most part, and got a lot of money that has come in. Is
:19:10. > :19:13.there a risk of crisis in these countries when the money leaves,
:19:14. > :19:17.because investors have been pulling out, convinces are down between ten
:19:18. > :19:23.to 20% and for many of these countries since last May, when
:19:24. > :19:29.tapering was first suggested? -- currencies are down between ten and
:19:30. > :19:33.20%. They have had a healthy, high growth. It is dependent on whether
:19:34. > :19:37.in the past five years when the situation was easy, but they
:19:38. > :19:42.accommodate and are strengthening their fundamentals, improving their
:19:43. > :19:46.fiscal balance, strengthening their financial institutions, improving
:19:47. > :19:55.their competitiveness by improving Labour market policy. So what is now
:19:56. > :20:00.the market becoming very, very scrutinising the balance sheet as
:20:01. > :20:04.well as looking very carefully about... This actually will provide
:20:05. > :20:10.a very good lesson but it is not new at all for many people in developing
:20:11. > :20:15.countries, that they have to invest more on a structured reform.
:20:16. > :20:18.Strengthening their fundamental. A lot of them have already done a
:20:19. > :20:23.stress test and that is good, for them to do a regular stress test,
:20:24. > :20:29.and that shows whether they potentially will see this, whether
:20:30. > :20:34.it will hit the weakest part of the economy, whether it is on the
:20:35. > :20:40.fiscal, on the balance of payment, back to the central bank or even
:20:41. > :20:43.financial settlements and corporate. Many of the corporate are expanding
:20:44. > :20:46.quite a lot in these countries and that is something that needs to be
:20:47. > :20:52.watched. Are there specific countries that you are concerned
:20:53. > :20:56.about? Many of those countries now in the political cycle, where there
:20:57. > :21:00.is collection and change of Government, and that creates
:21:01. > :21:09.additional uncertainty about the direction, but I think usually you
:21:10. > :21:16.can see it well and in this case the best thing for many of these
:21:17. > :21:19.emerging economies is to try to strengthen their economy and provide
:21:20. > :21:24.clarity about the policy direction. That will make the difference. Thank
:21:25. > :21:29.you. The Fed was not the only big event
:21:30. > :21:34.in Washington this week. President Obama set out his policy priorities
:21:35. > :21:40.in his annual State of the Union address. Perhaps surprisingly, given
:21:41. > :21:43.the state of the economy, his focus was economic. -- perhaps
:21:44. > :21:48.unsurprisingly. It is what drew our forebears here.
:21:49. > :21:55.It is how the daughter of a factory worker is CEO of America's largest
:21:56. > :22:00.auto-maker. How the son of a single mother can be president of the
:22:01. > :22:03.greatest nation on earth. It was a line that garnered much
:22:04. > :22:11.applause. But what followed was a series of practical and small policy
:22:12. > :22:14.proposals. After five years of great and determined effort, the United
:22:15. > :22:18.States is better positioned for the 21st-century than any other nation
:22:19. > :22:24.on earth. The question for everyone in this chamber running through
:22:25. > :22:34.every decision we make this year, is whether we are going to help or
:22:35. > :22:37.hinder this progress. Obama's year of action seems to involve going it
:22:38. > :22:44.alone through executive orders. There are significant limits to what
:22:45. > :22:53.he can achieve without... For President Obama it is as if a former
:22:54. > :22:56.governor's observation has come true.
:22:57. > :23:00.The President's audacity of Hope has become a lot more pragmatic. For the
:23:01. > :23:06.Fed, a lot of the tough tasks are in store for its new chair. Janet
:23:07. > :23:10.Yellen faces a global market monitoring her every move and still
:23:11. > :23:15.having to cope with deep pockets of stagnation in the US economy. It
:23:16. > :23:20.looks like a bumpy road ahead. That is all we have time for next week.
:23:21. > :23:22.Check out our website and me on Twitter. And join us next week for
:23:23. > :23:37.more Talking Business with Linda Yueh.
:23:38. > :23:44.The weather is calming just a touch through the night and tomorrow. But
:23:45. > :23:48.it is still pretty lively out there. Still strong gusts of wind
:23:49. > :23:51.around northern England and on western coasts. More shudders
:23:52. > :23:53.through the night as well. Tomorrow still a few showers here and there
:23:54. > :23:55.but