01/02/2014 Talking Business with Linda Yueh


01/02/2014

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Now on BBC News Talking Business with Linda Yueh.

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It's a new era at the Federal Reserve with a woman in charge for

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the first time. The end of the era of cheap money has rattled global

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markets. Will Janet Yellen be able to orchestrate a smooth unwinding of

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the Fed's programme? What is the state of the US economy? I'm Linda

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Yueh with Talking Business from Washington DC.

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A warm welcome to the programme. It's a new era at the Fed in more

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ways than one. There is a new chair, Janet Yellen, who takes the helm,

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global markets are in turmoil as the Fed unwinds its cash stimulus

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programme. I want to go and take a look at what this new era could

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involve. There have been many different ways of handling the

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economy. But always one common denominator - there was a man in

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charge. But that's changing. Janet Yellen is taking over. A 67-year-old

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former academic, moving up from the number two job at the Fed, she will

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present a radically different face, but not radically different policies

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from her predecessor, Ben Bernanke. To support the recovery, he flooded

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the economy with cheap cash for five years and kept rates low. Now, that

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the economy is getting back on track, Janet Yellen's era will be

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different and she has made clear what her focus will be. The mandate

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of the Federal Reserve is to serve all the American people. Too many

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Americans still can't find a job and worry how they will pay their bills.

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The Federal Reserve can help if it does its job effectively. That means

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reducing unemployment. To succeed, Janet Yellen must keep borrowing

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costs low until the recovery takes hold, persuading markets that the

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end of cash injections doesn't mean higher interest rates and that will

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be the challenge of her early tenure. Joining me now is Randall

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Kroszner. Lovely to see you. Thank you for joining us from New York.

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Let me start off by asking you will there be a seamless transition, or

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could there be some surprises in the handover between the Fed chairs? It

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is highly unlikely that Janet Yellen will become chair on February 1st

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and say, "I disagree everything that Ben made me do for the last few

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years." LAUGHTER She and the chairman have worked very closely

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together, have worked on the communication strategy, have worked

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on the quantitative easing strategy. So you will see a lot of continuity

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there. The Fed is unwinding its cash stimulus programme. Global markets

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are worried about it. So, what do you think are the key points we

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should be watching for under Janet Yellen? Certainly, the volatility

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that is occurring now in emerging markets, we have to see whether that

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is a short life phenomenon or whether it will have longer legs and

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lead to more potential problems internationally, international risks

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that could hit the US. One of the big challenges is going to be

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communication. The strategy that had developed, talked about an

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unemployment goal of 6.5%. Well, we are getting very close to 6.5% and

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the Fed wants to make it clear that they are not going to be reducing -

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increasing rates any time soon. It will become more and more difficult

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as the unemployment rate falls below 6.5% to be able to say well, we are

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keeping it long beyond 6.5%. They will have to either change the

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target or they will have to introduce other considerations,

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perhaps more of a focus on inflation where the potential for -- with the

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potential for deflation. There is a lot of concern about the credibility

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of forward guidance, given how quickly unemployment has come down.

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Do you think a dhapk in target -- change in target is likely, or will

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it be more communication rather than a change in target or new targets

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that will govern policy going ahead? I think ultimately, as the

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unemployment rate comes down - it is coming down in the US for the wrong

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reasons - it is not because more people are being employed but

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because fewer people are looking for work. The labour force participation

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is quite low. They have to talk about it differently. Perhaps they

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would move down to another number, but moving more towards some of the

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concerns about the very low inflation outcomes, the report we

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got this morning suggested inflation is still at very low levels. So,

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moving towards talking about some of these other issues just as much and

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perhaps more than the employment rate will be something that they

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have to pivot to. Do you think the criticism that the Fed doesn't pay

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enough attention to global markets is warranted? Well, a lot of the

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turmoil we have been seeing has been really domestic problems in

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different countries. People are trying to blame the Fed for what is

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going on in Turkey, but domestic political problems, pressures that

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the Central Bank had faced not to raise interest rates earlier, it is

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hard to say that is Ben Bernanke Oriel yell yell's fault. The -- or

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Janet Yellen's fault. The Fed will take into account the fragilities

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that are out there and the consequences of that. To say that

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it's directly the Fed's fault is a little bit off to say the least.

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That was Randall Kroszner, a former Fed governor. Joining me now to

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discuss the challenges facing the Fed are Adam Posen, President of the

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Peter son Institute, and Beth Ann Bovino, chief US economist. Welcome

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to both of you. Adam, I will start with you on this. We just heard

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Randall Kroszner talk about the domestic challenges that a lot of

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different countries have around the world as they face this new era. I

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want to come back to a bit of America's challenges. It does seem

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like the American economy is better - we have had a growth rate of

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coming out of 3.28%. This is hardly a stunning rebound. Is it the right

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time to be stopping the stimulus cash support? We can debate the

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exact forecast. That is an indicator that we are back in the realm of

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normal economy. There is no question of the direction the economy was

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unfortunately heading and therefore the direction the Fed had to be

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heading, which was more ease, more ease, more ease. Now it is

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legitimate to say well, some people - myself included - would say it is

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premature to tighten. But it is back to the normal life of are we getting

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it exactly right or not? When we talk about the strength of the US

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economy, it is important to remember that this 3.2% growth we saw this

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year is higher in the private sector. We had the fiscal follies in

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the US and we had the tapering talk that started in May under Chairman

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Ben Bernanke. The underlying growth rate is now quite strong. Do you

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agree, Beth Ann? I agree for the most part. I do think in terms of

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the strength of the US economy, I have been looking at 2013. The

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surprising resilience in the private sector. You are seeing

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manufacturing, a new change there that I don't think will go away for

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some time. You see energy production and the energy boom is something

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that will be a multi-generational impact on growth in the United

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States. Certainly, we do have ways to go with jobs as was pointed out.

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The labour market participation rate is at a 35-year low. With housing

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turning around and looking like it will be relatively strong for this

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year and the next, we will continue to see that going forward. I think,

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though, in terms of quantitative easing, I got the feeling they were

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ready to move away from it. I think that the US economy - what is really

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important to know is that the Fed has confidence that we can absorb

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this pull-back in terms of purchase or bond purchases and still continue

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to grow. Adam, one of the things that I see when I look at forward

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guidance is this attempt to say we have stopped injecting cash, but

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rates will stay low. Is that credible? Basically, no. I think the

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Bank of England just discovered this. They attempted forward

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guidance as well. The economy turned out better than they thought. So

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they gave it up. It was important, the question you posed to Randall

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Kroszner and his response. Do you fiddle with the target of what you

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announced? That doesn't do anything except add confusion. The forward

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guidance will be empty talk. It will be about the forecast. Where do you

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come out on this? When you are looking at it, do you think forward

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guidance is a credible policy? Are you more focussed on the individual

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forecast of when the first rate rises will come? Sure. What I was

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expecting - and I am waiting for more guidance from the Fed - they

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have changed the unemployment rate threshold at 6.5% and now they say -

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I'm sorry the interest rates will stay very low. What does that mean?

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I'd like more clarity on that. It seems they are not sure where to go

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with that. I'm concerned about forward guidance. It has been a

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strength. It was all they had. I'm glad it was a strength for the US

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economy. It did keep interest rates down significantly. However, as we

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get closer to that 6.5% threshold, what are they going to do. They will

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need to act. They will be more relying on what the individual

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forecasts are from the Governors and from the President. The other big

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issue for the US, the fiscal side. Right. How is that going to play

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out, Adam? Fiscal, if monetary policies no longer are as loose and

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fiscal tightening plays into it, what does that do? We had very tight

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policies. After the big stimulus at the start of 2009, we have had

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relatively tight policies in the federal government, quite tight

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policies in state and local government. Those have shifted this

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year. State and local government has gone to neutral. Looking ahead at

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the State of the Union and praying for no more budget crack-ups between

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Congress and the President, they should be less of a contraction.

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It's resulted in quite a good consolidation. It may have been done

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in a stupid way that raised risks. It may have cut the wrong things. If

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you look at the budget numbers, growth plus the non-ability to turn

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over taxes and spend meant that the US budget position is much stronger

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than it was five years ago. One of the big concerns about what the Fed

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is doing is that emerging economies could be plunged into crisis. Is

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that a possibility and a risk? I think it is possible but I do not

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think it is directly due to the Fed. Let's say they slowed down on

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tapering so you have maybe a little more inflation and growth in the US.

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That will not make a difference to the Turkish or the Thai Government

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situations, it will not make a difference to inflation in India or

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Argentina, fundamentally. To keep it short, ditto. I agree. I can say

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that I think the Fed, during their meetings they spent a lot of time

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talking about what is happening with emerging markets and the sell-off.

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They are also looking about is there a spill-over effects to US markets?

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Which is their mandate, to focus on what happens to jobs and rice

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stability. This is something they will focus on but I did not think

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they were going to act on what is happening abroad. Thank you to my

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guests. There is no question that the Fed's actions have a significant

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global impact, as well as on the global economy. Our emerging markets

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prepared for the end of the era of cheap money? Is the US economy

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ready? I went to two places, Jakarta in Indonesia and Maryland in the US

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to see the effect of the tapering of the unwinding of the Fed's stimulus.

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January on Maryland's Eastern Shore. Like many other places in the United

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States, this still lies in economic deepfreeze. Kind of take one day at

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a time... This man has been building and repairing boats here for over 30

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years. He's handing on but has had to let go of of his workers. What

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the Fed has done does not making optimistic. I do not really see

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anything that would encourage me to go out and borrow extra money to do

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extra things, to put extra people to work. I do not seek absolutely

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nothing. This small town has everything we have come to expect

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since the financial crisis. -employment, a lot of home

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foreclosures, and empty Main Street is. But things have been bad here

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for a long time. We can see it and we see it on TV but when you get

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down to us, there was a joke you used to tell around here, if we had

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a depression, it would take us ten years before we knew it, because we

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have been depressed for so long. That is kind of situation. That is a

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situation that has caused the Fed to pump in cash for the past five

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years. And now they are cutting back. Even though all of the

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attention is on the Fed's tapering, or cutting back, its cash

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injections, what matters for the fragile recovery is where interest

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rates are headed. Managing that will be the Fed's biggest challenge. If

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rates start to rise, people who are struggling could struggle more, and

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the recovery could be over just as it has begun. For the world economy,

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the Federal Reserve's actions are watched like no other. Especially in

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the emerging markets such as Indonesia, which are specially

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vulnerable. Fragile. A measure of fragility is how uncomfortably eight

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country can manage its debt, and Indonesia has a lot. For percent of

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GDP is owed to foreign creditors. It means that the burden is getting

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harder and harder to manage. They are hard at work in this plastic

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factory but this country is considered a member of the fragile

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five because it imports more than it exports, so it goes a lot more than

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it earns. Still, the Government is confident that no matter what the

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Fed does, investors will still think they are worth the risk. Our

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long-term growth is 6% or 6.5% while the US is around 3%. So in terms of

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growth we are offering a better return and believe the improving

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global economy will improve confidence of global investors to

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invest in a more risky country like this. The good times, cheap money,

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was always going to end. Emerging economies now need to convince

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investors to stay put. I am joined by managing director at

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the World Bank and the former Indonesian finance minister. It is

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wonderful to have you here. I recently went to your country to see

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the impact of the Fed's actions. Indonesia has been classed as one of

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the fragile five countries which are said to be at risk when the ear of

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cheap money ends. Do you think there is a risk to Indonesia, or is it

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incorrect? They look at the response to the macro and Mick indicator more

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than the deficit. Donations in 2008-2009 or even back in the

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financial crisis in 1997-98 has done a lot of good jobs in reforming

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their structural weaknesses, whether this is in the banking sector, in

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the balancing of the central bank, or even in some other area of the

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economy. If you look at the disco deficit, it is never actually above

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2%. -- fiscal deficit. So there is now confidence and that is exactly

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why they group Indonesia with the others like turkey or even South

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Africa and Brazil. Looking at this country is much more widely,

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emerging economies have had quite a roller-coaster ride. They did very

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well 2008 for the most part, and got a lot of money that has come in. Is

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there a risk of crisis in these countries when the money leaves,

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because investors have been pulling out, convinces are down between ten

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to 20% and for many of these countries since last May, when

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tapering was first suggested? -- currencies are down between ten and

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20%. They have had a healthy, high growth. It is dependent on whether

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in the past five years when the situation was easy, but they

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accommodate and are strengthening their fundamentals, improving their

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fiscal balance, strengthening their financial institutions, improving

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their competitiveness by improving Labour market policy. So what is now

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the market becoming very, very scrutinising the balance sheet as

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well as looking very carefully about... This actually will provide

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a very good lesson but it is not new at all for many people in developing

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countries, that they have to invest more on a structured reform.

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Strengthening their fundamental. A lot of them have already done a

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stress test and that is good, for them to do a regular stress test,

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and that shows whether they potentially will see this, whether

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it will hit the weakest part of the economy, whether it is on the

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fiscal, on the balance of payment, back to the central bank or even

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financial settlements and corporate. Many of the corporate are expanding

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quite a lot in these countries and that is something that needs to be

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watched. Are there specific countries that you are concerned

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about? Many of those countries now in the political cycle, where there

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is collection and change of Government, and that creates

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additional uncertainty about the direction, but I think usually you

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can see it well and in this case the best thing for many of these

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emerging economies is to try to strengthen their economy and provide

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clarity about the policy direction. That will make the difference. Thank

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you. The Fed was not the only big event

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in Washington this week. President Obama set out his policy priorities

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in his annual State of the Union address. Perhaps surprisingly, given

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the state of the economy, his focus was economic. -- perhaps

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unsurprisingly. It is what drew our forebears here.

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It is how the daughter of a factory worker is CEO of America's largest

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auto-maker. How the son of a single mother can be president of the

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greatest nation on earth. It was a line that garnered much

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applause. But what followed was a series of practical and small policy

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proposals. After five years of great and determined effort, the United

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States is better positioned for the 21st-century than any other nation

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on earth. The question for everyone in this chamber running through

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every decision we make this year, is whether we are going to help or

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hinder this progress. Obama's year of action seems to involve going it

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alone through executive orders. There are significant limits to what

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he can achieve without... For President Obama it is as if a former

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governor's observation has come true.

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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

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Yellen faces a global market monitoring her every move and still

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having to cope with deep pockets of stagnation in the US economy. It

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looks like a bumpy road ahead. That is all we have time for next week.

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Check out our website and me on Twitter. And join us next week for

:23:21.:23:22.

more Talking Business with Linda Yueh.

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The weather is calming just a touch through the night and tomorrow. But

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it is still pretty lively out there. Still strong gusts of wind

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around northern England and on western coasts. More shudders

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through the night as well. Tomorrow still a few showers here and there

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but

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