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Now on BBC News Talking Business with Linda Yueh. | :00:00. | :00:07. | |
It's a new era at the Federal Reserve with a woman in charge for | :00:08. | :00:10. | |
the first time. The end of the era of cheap money has rattled global | :00:11. | :00:15. | |
markets. Will Janet Yellen be able to orchestrate a smooth unwinding of | :00:16. | :00:23. | |
the Fed's programme? What is the state of the US economy? I'm Linda | :00:24. | :00:36. | |
Yueh with Talking Business from Washington DC. | :00:37. | :00:48. | |
A warm welcome to the programme. It's a new era at the Fed in more | :00:49. | :00:54. | |
ways than one. There is a new chair, Janet Yellen, who takes the helm, | :00:55. | :00:59. | |
global markets are in turmoil as the Fed unwinds its cash stimulus | :01:00. | :01:07. | |
programme. I want to go and take a look at what this new era could | :01:08. | :01:12. | |
involve. There have been many different ways of handling the | :01:13. | :01:17. | |
economy. But always one common denominator - there was a man in | :01:18. | :01:22. | |
charge. But that's changing. Janet Yellen is taking over. A 67-year-old | :01:23. | :01:28. | |
former academic, moving up from the number two job at the Fed, she will | :01:29. | :01:33. | |
present a radically different face, but not radically different policies | :01:34. | :01:40. | |
from her predecessor, Ben Bernanke. To support the recovery, he flooded | :01:41. | :01:46. | |
the economy with cheap cash for five years and kept rates low. Now, that | :01:47. | :01:50. | |
the economy is getting back on track, Janet Yellen's era will be | :01:51. | :01:53. | |
different and she has made clear what her focus will be. The mandate | :01:54. | :02:00. | |
of the Federal Reserve is to serve all the American people. Too many | :02:01. | :02:10. | |
Americans still can't find a job and worry how they will pay their bills. | :02:11. | :02:15. | |
The Federal Reserve can help if it does its job effectively. That means | :02:16. | :02:21. | |
reducing unemployment. To succeed, Janet Yellen must keep borrowing | :02:22. | :02:25. | |
costs low until the recovery takes hold, persuading markets that the | :02:26. | :02:29. | |
end of cash injections doesn't mean higher interest rates and that will | :02:30. | :02:38. | |
be the challenge of her early tenure. Joining me now is Randall | :02:39. | :02:43. | |
Kroszner. Lovely to see you. Thank you for joining us from New York. | :02:44. | :02:49. | |
Let me start off by asking you will there be a seamless transition, or | :02:50. | :02:54. | |
could there be some surprises in the handover between the Fed chairs? It | :02:55. | :02:58. | |
is highly unlikely that Janet Yellen will become chair on February 1st | :02:59. | :03:04. | |
and say, "I disagree everything that Ben made me do for the last few | :03:05. | :03:08. | |
years." LAUGHTER She and the chairman have worked very closely | :03:09. | :03:11. | |
together, have worked on the communication strategy, have worked | :03:12. | :03:15. | |
on the quantitative easing strategy. So you will see a lot of continuity | :03:16. | :03:28. | |
there. The Fed is unwinding its cash stimulus programme. Global markets | :03:29. | :03:34. | |
are worried about it. So, what do you think are the key points we | :03:35. | :03:37. | |
should be watching for under Janet Yellen? Certainly, the volatility | :03:38. | :03:42. | |
that is occurring now in emerging markets, we have to see whether that | :03:43. | :03:45. | |
is a short life phenomenon or whether it will have longer legs and | :03:46. | :03:51. | |
lead to more potential problems internationally, international risks | :03:52. | :03:55. | |
that could hit the US. One of the big challenges is going to be | :03:56. | :04:00. | |
communication. The strategy that had developed, talked about an | :04:01. | :04:07. | |
unemployment goal of 6.5%. Well, we are getting very close to 6.5% and | :04:08. | :04:11. | |
the Fed wants to make it clear that they are not going to be reducing - | :04:12. | :04:17. | |
increasing rates any time soon. It will become more and more difficult | :04:18. | :04:21. | |
as the unemployment rate falls below 6.5% to be able to say well, we are | :04:22. | :04:27. | |
keeping it long beyond 6.5%. They will have to either change the | :04:28. | :04:30. | |
target or they will have to introduce other considerations, | :04:31. | :04:33. | |
perhaps more of a focus on inflation where the potential for -- with the | :04:34. | :04:40. | |
potential for deflation. There is a lot of concern about the credibility | :04:41. | :04:46. | |
of forward guidance, given how quickly unemployment has come down. | :04:47. | :04:51. | |
Do you think a dhapk in target -- change in target is likely, or will | :04:52. | :04:54. | |
it be more communication rather than a change in target or new targets | :04:55. | :04:59. | |
that will govern policy going ahead? I think ultimately, as the | :05:00. | :05:02. | |
unemployment rate comes down - it is coming down in the US for the wrong | :05:03. | :05:06. | |
reasons - it is not because more people are being employed but | :05:07. | :05:09. | |
because fewer people are looking for work. The labour force participation | :05:10. | :05:14. | |
is quite low. They have to talk about it differently. Perhaps they | :05:15. | :05:18. | |
would move down to another number, but moving more towards some of the | :05:19. | :05:25. | |
concerns about the very low inflation outcomes, the report we | :05:26. | :05:29. | |
got this morning suggested inflation is still at very low levels. So, | :05:30. | :05:35. | |
moving towards talking about some of these other issues just as much and | :05:36. | :05:39. | |
perhaps more than the employment rate will be something that they | :05:40. | :05:47. | |
have to pivot to. Do you think the criticism that the Fed doesn't pay | :05:48. | :05:51. | |
enough attention to global markets is warranted? Well, a lot of the | :05:52. | :05:59. | |
turmoil we have been seeing has been really domestic problems in | :06:00. | :06:01. | |
different countries. People are trying to blame the Fed for what is | :06:02. | :06:07. | |
going on in Turkey, but domestic political problems, pressures that | :06:08. | :06:15. | |
the Central Bank had faced not to raise interest rates earlier, it is | :06:16. | :06:20. | |
hard to say that is Ben Bernanke Oriel yell yell's fault. The -- or | :06:21. | :06:30. | |
Janet Yellen's fault. The Fed will take into account the fragilities | :06:31. | :06:33. | |
that are out there and the consequences of that. To say that | :06:34. | :06:38. | |
it's directly the Fed's fault is a little bit off to say the least. | :06:39. | :06:44. | |
That was Randall Kroszner, a former Fed governor. Joining me now to | :06:45. | :06:48. | |
discuss the challenges facing the Fed are Adam Posen, President of the | :06:49. | :06:58. | |
Peter son Institute, and Beth Ann Bovino, chief US economist. Welcome | :06:59. | :07:03. | |
to both of you. Adam, I will start with you on this. We just heard | :07:04. | :07:08. | |
Randall Kroszner talk about the domestic challenges that a lot of | :07:09. | :07:12. | |
different countries have around the world as they face this new era. I | :07:13. | :07:16. | |
want to come back to a bit of America's challenges. It does seem | :07:17. | :07:21. | |
like the American economy is better - we have had a growth rate of | :07:22. | :07:27. | |
coming out of 3.28%. This is hardly a stunning rebound. Is it the right | :07:28. | :07:34. | |
time to be stopping the stimulus cash support? We can debate the | :07:35. | :07:38. | |
exact forecast. That is an indicator that we are back in the realm of | :07:39. | :07:42. | |
normal economy. There is no question of the direction the economy was | :07:43. | :07:46. | |
unfortunately heading and therefore the direction the Fed had to be | :07:47. | :07:49. | |
heading, which was more ease, more ease, more ease. Now it is | :07:50. | :07:53. | |
legitimate to say well, some people - myself included - would say it is | :07:54. | :07:57. | |
premature to tighten. But it is back to the normal life of are we getting | :07:58. | :08:02. | |
it exactly right or not? When we talk about the strength of the US | :08:03. | :08:06. | |
economy, it is important to remember that this 3.2% growth we saw this | :08:07. | :08:11. | |
year is higher in the private sector. We had the fiscal follies in | :08:12. | :08:16. | |
the US and we had the tapering talk that started in May under Chairman | :08:17. | :08:23. | |
Ben Bernanke. The underlying growth rate is now quite strong. Do you | :08:24. | :08:30. | |
agree, Beth Ann? I agree for the most part. I do think in terms of | :08:31. | :08:34. | |
the strength of the US economy, I have been looking at 2013. The | :08:35. | :08:41. | |
surprising resilience in the private sector. You are seeing | :08:42. | :08:45. | |
manufacturing, a new change there that I don't think will go away for | :08:46. | :08:49. | |
some time. You see energy production and the energy boom is something | :08:50. | :08:52. | |
that will be a multi-generational impact on growth in the United | :08:53. | :08:55. | |
States. Certainly, we do have ways to go with jobs as was pointed out. | :08:56. | :09:04. | |
The labour market participation rate is at a 35-year low. With housing | :09:05. | :09:12. | |
turning around and looking like it will be relatively strong for this | :09:13. | :09:15. | |
year and the next, we will continue to see that going forward. I think, | :09:16. | :09:19. | |
though, in terms of quantitative easing, I got the feeling they were | :09:20. | :09:24. | |
ready to move away from it. I think that the US economy - what is really | :09:25. | :09:29. | |
important to know is that the Fed has confidence that we can absorb | :09:30. | :09:34. | |
this pull-back in terms of purchase or bond purchases and still continue | :09:35. | :09:37. | |
to grow. Adam, one of the things that I see when I look at forward | :09:38. | :09:41. | |
guidance is this attempt to say we have stopped injecting cash, but | :09:42. | :09:45. | |
rates will stay low. Is that credible? Basically, no. I think the | :09:46. | :09:50. | |
Bank of England just discovered this. They attempted forward | :09:51. | :09:57. | |
guidance as well. The economy turned out better than they thought. So | :09:58. | :10:04. | |
they gave it up. It was important, the question you posed to Randall | :10:05. | :10:12. | |
Kroszner and his response. Do you fiddle with the target of what you | :10:13. | :10:18. | |
announced? That doesn't do anything except add confusion. The forward | :10:19. | :10:22. | |
guidance will be empty talk. It will be about the forecast. Where do you | :10:23. | :10:28. | |
come out on this? When you are looking at it, do you think forward | :10:29. | :10:34. | |
guidance is a credible policy? Are you more focussed on the individual | :10:35. | :10:37. | |
forecast of when the first rate rises will come? Sure. What I was | :10:38. | :10:45. | |
expecting - and I am waiting for more guidance from the Fed - they | :10:46. | :10:50. | |
have changed the unemployment rate threshold at 6.5% and now they say - | :10:51. | :10:57. | |
I'm sorry the interest rates will stay very low. What does that mean? | :10:58. | :11:05. | |
I'd like more clarity on that. It seems they are not sure where to go | :11:06. | :11:09. | |
with that. I'm concerned about forward guidance. It has been a | :11:10. | :11:13. | |
strength. It was all they had. I'm glad it was a strength for the US | :11:14. | :11:18. | |
economy. It did keep interest rates down significantly. However, as we | :11:19. | :11:21. | |
get closer to that 6.5% threshold, what are they going to do. They will | :11:22. | :11:27. | |
need to act. They will be more relying on what the individual | :11:28. | :11:30. | |
forecasts are from the Governors and from the President. The other big | :11:31. | :11:35. | |
issue for the US, the fiscal side. Right. How is that going to play | :11:36. | :11:41. | |
out, Adam? Fiscal, if monetary policies no longer are as loose and | :11:42. | :11:49. | |
fiscal tightening plays into it, what does that do? We had very tight | :11:50. | :11:53. | |
policies. After the big stimulus at the start of 2009, we have had | :11:54. | :11:58. | |
relatively tight policies in the federal government, quite tight | :11:59. | :12:01. | |
policies in state and local government. Those have shifted this | :12:02. | :12:08. | |
year. State and local government has gone to neutral. Looking ahead at | :12:09. | :12:14. | |
the State of the Union and praying for no more budget crack-ups between | :12:15. | :12:23. | |
Congress and the President, they should be less of a contraction. | :12:24. | :12:31. | |
It's resulted in quite a good consolidation. It may have been done | :12:32. | :12:35. | |
in a stupid way that raised risks. It may have cut the wrong things. If | :12:36. | :12:39. | |
you look at the budget numbers, growth plus the non-ability to turn | :12:40. | :12:45. | |
over taxes and spend meant that the US budget position is much stronger | :12:46. | :12:52. | |
than it was five years ago. One of the big concerns about what the Fed | :12:53. | :12:56. | |
is doing is that emerging economies could be plunged into crisis. Is | :12:57. | :13:01. | |
that a possibility and a risk? I think it is possible but I do not | :13:02. | :13:08. | |
think it is directly due to the Fed. Let's say they slowed down on | :13:09. | :13:12. | |
tapering so you have maybe a little more inflation and growth in the US. | :13:13. | :13:16. | |
That will not make a difference to the Turkish or the Thai Government | :13:17. | :13:21. | |
situations, it will not make a difference to inflation in India or | :13:22. | :13:25. | |
Argentina, fundamentally. To keep it short, ditto. I agree. I can say | :13:26. | :13:32. | |
that I think the Fed, during their meetings they spent a lot of time | :13:33. | :13:35. | |
talking about what is happening with emerging markets and the sell-off. | :13:36. | :13:39. | |
They are also looking about is there a spill-over effects to US markets? | :13:40. | :13:44. | |
Which is their mandate, to focus on what happens to jobs and rice | :13:45. | :13:48. | |
stability. This is something they will focus on but I did not think | :13:49. | :13:52. | |
they were going to act on what is happening abroad. Thank you to my | :13:53. | :13:56. | |
guests. There is no question that the Fed's actions have a significant | :13:57. | :14:01. | |
global impact, as well as on the global economy. Our emerging markets | :14:02. | :14:05. | |
prepared for the end of the era of cheap money? Is the US economy | :14:06. | :14:10. | |
ready? I went to two places, Jakarta in Indonesia and Maryland in the US | :14:11. | :14:16. | |
to see the effect of the tapering of the unwinding of the Fed's stimulus. | :14:17. | :14:22. | |
January on Maryland's Eastern Shore. Like many other places in the United | :14:23. | :14:28. | |
States, this still lies in economic deepfreeze. Kind of take one day at | :14:29. | :14:33. | |
a time... This man has been building and repairing boats here for over 30 | :14:34. | :14:37. | |
years. He's handing on but has had to let go of of his workers. What | :14:38. | :14:43. | |
the Fed has done does not making optimistic. I do not really see | :14:44. | :14:52. | |
anything that would encourage me to go out and borrow extra money to do | :14:53. | :14:56. | |
extra things, to put extra people to work. I do not seek absolutely | :14:57. | :15:03. | |
nothing. This small town has everything we have come to expect | :15:04. | :15:07. | |
since the financial crisis. -employment, a lot of home | :15:08. | :15:11. | |
foreclosures, and empty Main Street is. But things have been bad here | :15:12. | :15:19. | |
for a long time. We can see it and we see it on TV but when you get | :15:20. | :15:24. | |
down to us, there was a joke you used to tell around here, if we had | :15:25. | :15:28. | |
a depression, it would take us ten years before we knew it, because we | :15:29. | :15:33. | |
have been depressed for so long. That is kind of situation. That is a | :15:34. | :15:38. | |
situation that has caused the Fed to pump in cash for the past five | :15:39. | :15:41. | |
years. And now they are cutting back. Even though all of the | :15:42. | :15:47. | |
attention is on the Fed's tapering, or cutting back, its cash | :15:48. | :15:51. | |
injections, what matters for the fragile recovery is where interest | :15:52. | :15:55. | |
rates are headed. Managing that will be the Fed's biggest challenge. If | :15:56. | :16:01. | |
rates start to rise, people who are struggling could struggle more, and | :16:02. | :16:05. | |
the recovery could be over just as it has begun. For the world economy, | :16:06. | :16:12. | |
the Federal Reserve's actions are watched like no other. Especially in | :16:13. | :16:18. | |
the emerging markets such as Indonesia, which are specially | :16:19. | :16:22. | |
vulnerable. Fragile. A measure of fragility is how uncomfortably eight | :16:23. | :16:27. | |
country can manage its debt, and Indonesia has a lot. For percent of | :16:28. | :16:36. | |
GDP is owed to foreign creditors. It means that the burden is getting | :16:37. | :16:40. | |
harder and harder to manage. They are hard at work in this plastic | :16:41. | :16:43. | |
factory but this country is considered a member of the fragile | :16:44. | :16:48. | |
five because it imports more than it exports, so it goes a lot more than | :16:49. | :16:52. | |
it earns. Still, the Government is confident that no matter what the | :16:53. | :16:57. | |
Fed does, investors will still think they are worth the risk. Our | :16:58. | :17:04. | |
long-term growth is 6% or 6.5% while the US is around 3%. So in terms of | :17:05. | :17:08. | |
growth we are offering a better return and believe the improving | :17:09. | :17:14. | |
global economy will improve confidence of global investors to | :17:15. | :17:18. | |
invest in a more risky country like this. The good times, cheap money, | :17:19. | :17:26. | |
was always going to end. Emerging economies now need to convince | :17:27. | :17:32. | |
investors to stay put. I am joined by managing director at | :17:33. | :17:37. | |
the World Bank and the former Indonesian finance minister. It is | :17:38. | :17:44. | |
wonderful to have you here. I recently went to your country to see | :17:45. | :17:49. | |
the impact of the Fed's actions. Indonesia has been classed as one of | :17:50. | :17:54. | |
the fragile five countries which are said to be at risk when the ear of | :17:55. | :17:58. | |
cheap money ends. Do you think there is a risk to Indonesia, or is it | :17:59. | :18:06. | |
incorrect? They look at the response to the macro and Mick indicator more | :18:07. | :18:14. | |
than the deficit. Donations in 2008-2009 or even back in the | :18:15. | :18:18. | |
financial crisis in 1997-98 has done a lot of good jobs in reforming | :18:19. | :18:23. | |
their structural weaknesses, whether this is in the banking sector, in | :18:24. | :18:27. | |
the balancing of the central bank, or even in some other area of the | :18:28. | :18:32. | |
economy. If you look at the disco deficit, it is never actually above | :18:33. | :18:45. | |
2%. -- fiscal deficit. So there is now confidence and that is exactly | :18:46. | :18:50. | |
why they group Indonesia with the others like turkey or even South | :18:51. | :18:54. | |
Africa and Brazil. Looking at this country is much more widely, | :18:55. | :19:00. | |
emerging economies have had quite a roller-coaster ride. They did very | :19:01. | :19:04. | |
well 2008 for the most part, and got a lot of money that has come in. Is | :19:05. | :19:09. | |
there a risk of crisis in these countries when the money leaves, | :19:10. | :19:13. | |
because investors have been pulling out, convinces are down between ten | :19:14. | :19:17. | |
to 20% and for many of these countries since last May, when | :19:18. | :19:23. | |
tapering was first suggested? -- currencies are down between ten and | :19:24. | :19:29. | |
20%. They have had a healthy, high growth. It is dependent on whether | :19:30. | :19:33. | |
in the past five years when the situation was easy, but they | :19:34. | :19:37. | |
accommodate and are strengthening their fundamentals, improving their | :19:38. | :19:42. | |
fiscal balance, strengthening their financial institutions, improving | :19:43. | :19:46. | |
their competitiveness by improving Labour market policy. So what is now | :19:47. | :19:55. | |
the market becoming very, very scrutinising the balance sheet as | :19:56. | :20:00. | |
well as looking very carefully about... This actually will provide | :20:01. | :20:04. | |
a very good lesson but it is not new at all for many people in developing | :20:05. | :20:10. | |
countries, that they have to invest more on a structured reform. | :20:11. | :20:15. | |
Strengthening their fundamental. A lot of them have already done a | :20:16. | :20:18. | |
stress test and that is good, for them to do a regular stress test, | :20:19. | :20:23. | |
and that shows whether they potentially will see this, whether | :20:24. | :20:29. | |
it will hit the weakest part of the economy, whether it is on the | :20:30. | :20:34. | |
fiscal, on the balance of payment, back to the central bank or even | :20:35. | :20:40. | |
financial settlements and corporate. Many of the corporate are expanding | :20:41. | :20:43. | |
quite a lot in these countries and that is something that needs to be | :20:44. | :20:46. | |
watched. Are there specific countries that you are concerned | :20:47. | :20:52. | |
about? Many of those countries now in the political cycle, where there | :20:53. | :20:56. | |
is collection and change of Government, and that creates | :20:57. | :21:00. | |
additional uncertainty about the direction, but I think usually you | :21:01. | :21:09. | |
can see it well and in this case the best thing for many of these | :21:10. | :21:16. | |
emerging economies is to try to strengthen their economy and provide | :21:17. | :21:19. | |
clarity about the policy direction. That will make the difference. Thank | :21:20. | :21:24. | |
you. The Fed was not the only big event | :21:25. | :21:29. | |
in Washington this week. President Obama set out his policy priorities | :21:30. | :21:34. | |
in his annual State of the Union address. Perhaps surprisingly, given | :21:35. | :21:40. | |
the state of the economy, his focus was economic. -- perhaps | :21:41. | :21:43. | |
unsurprisingly. It is what drew our forebears here. | :21:44. | :21:48. | |
It is how the daughter of a factory worker is CEO of America's largest | :21:49. | :21:55. | |
auto-maker. How the son of a single mother can be president of the | :21:56. | :22:00. | |
greatest nation on earth. It was a line that garnered much | :22:01. | :22:03. | |
applause. But what followed was a series of practical and small policy | :22:04. | :22:11. | |
proposals. After five years of great and determined effort, the United | :22:12. | :22:14. | |
States is better positioned for the 21st-century than any other nation | :22:15. | :22:18. | |
on earth. The question for everyone in this chamber running through | :22:19. | :22:24. | |
every decision we make this year, is whether we are going to help or | :22:25. | :22:34. | |
hinder this progress. Obama's year of action seems to involve going it | :22:35. | :22:37. | |
alone through executive orders. There are significant limits to what | :22:38. | :22:44. | |
he can achieve without... For President Obama it is as if a former | :22:45. | :22:53. | |
governor's observation has come true. | :22:54. | :22:56. | |
The President's audacity of Hope has become a lot more pragmatic. For the | :22:57. | :23:00. | |
Fed, a lot of the tough tasks are in store for its new chair. Janet | :23:01. | :23:06. | |
Yellen faces a global market monitoring her every move and still | :23:07. | :23:10. | |
having to cope with deep pockets of stagnation in the US economy. It | :23:11. | :23:15. | |
looks like a bumpy road ahead. That is all we have time for next week. | :23:16. | :23:20. | |
Check out our website and me on Twitter. And join us next week for | :23:21. | :23:22. | |
more Talking Business with Linda Yueh. | :23:23. | :23:37. | |
The weather is calming just a touch through the night and tomorrow. But | :23:38. | :23:44. | |
it is still pretty lively out there. Still strong gusts of wind | :23:45. | :23:48. | |
around northern England and on western coasts. More shudders | :23:49. | :23:51. | |
through the night as well. Tomorrow still a few showers here and there | :23:52. | :23:53. | |
but | :23:54. | :23:55. |