* India central banker says U.S. should do the right thing
* IMF calls for vigilance over turbulent markets
* Fed officials line up to defend withdrawal of stimulus
By Neha Dasgupta and Jonathan Spicer
MUMBAI/NEW YORK, Jan 31 The Federal Reserve's
decision to keep trimming its economic stimulus drew fire on
Friday as India's central bank chief said Americans should be
more attuned to the global impact of their policies, and the IMF
called for vigilance given strains in financial markets.
The push-back came on Fed Chairman Ben Bernanke's last day
on the job and two days after the U.S. central bank reduced the
pace of its huge asset purchase program. The Fed made the move
on Wednesday despite a bruising selloff in emerging markets that
was prompted in part by the prospect of less U.S. monetary
With the turmoil in currencies and stocks spreading into
more emerging markets on Friday, Fed officials, addressing the
rout for the first time, offered no hint the sell-off would
influence their policy stance unless the U.S. economy were
But in Mumbai, Reserve Bank of India Governor Raghuram Rajan
said the United States "should worry about the effects of its
policies on the rest of the world."
"We would like to live in a world where countries take into
account the effect of their policies on other countries and do
what is right, rather than what is just right given the
circumstances of their own country," he said at an event on
organised by The Times of India newspaper.
Financial markets in India, Turkey, Argentina and elsewhere
have boomed in recent years as the Fed's measures to bolster
economic growth at home - including asset purchases and
ultra-low interest rates - encouraged investors to seek higher
returns in emerging economies.
As the Fed began to talk of unwinding its policy last year,
the money began to flow back out, a trend that ramped up again
in the last two weeks on signs that China's economy is slowing.
Rajan, a former chief economist at the International
Monetary Fund, is well respected by central bankers globally as
being among the few who spoke out about signs of trouble in
markets well before the 2007-09 financial crisis set off the
His comments were echoed by the IMF, which on Friday called
on central banks to ensure that a financial market rout in the
developing world does not lead to an international funding
"The turbulence also underscores the need for vigilance
among central banks over liquidity conditions in international
capital markets," an IMF spokesman said.
The pressure, however, is unlikely to dissuade the Fed from
ramping down its asset purchases by later this year unless the
turbulence starts to derail recent momentum in the U.S. economy.
Fed policymakers did not mention emerging markets in a statement
on Wednesday, when they unanimously decided to trim bond-buying
by another $10 billion per month.
Indeed, all 70 economists polled by Reuters expect the
central bank to keep paring the purchases at that rate at
subsequent meetings, shuttering the program before year-end.
"So far I don't see anything that's happened in the last
month around markets as fundamentally shifting an improving
outlook for the U.S. economy and improving labor markets," San
Francisco Fed President John Williams said Friday on Fox
Williams, a centrist, said fellow policymakers discussed
emerging markets at their meeting this week, but added the Fed
should not focus too much on "short-term developments."
Speaking in South Africa, one of the countries hit by the
recent turmoil, Kansas City Fed President Esther George backed
the withdrawal of accommodation and warned that easy U.S.
policies will only work to distort exchange rates, capital
flows, and other international connections.
Richard Fisher of the Dallas Fed went even further, saying
countries like Poland and Mexico that used the influx of funds
to restructure their economies will do well as the Fed reduces
accommodation. Others, such as Brazil, will have a hard time, he
said in Fort Worth, Texas.
The debate, which amplified a day before Fed Vice Chair
Janet Yellen is to succeed Bernanke, highlights how central
banks and governments can get whip-sawed by the trillions of
dollars of investment seeking easy returns. In the so-called
cross-border currency trade, investors borrow in countries with
lower yields and invest in those with higher yields.
The IMF spokesman said some emerging market countries need
to take urgent action to improve their economies.
Turkey and South Africa, two of the hardest-hit in recent
days, responded by raising interest rates this week to help
support their currencies. The Reserve Bank of India also
tightened monetary policy, saying the action was aimed at
pushing down high consumer inflation.
Rajan, who took charge at the Reserve Bank of India last
September during the country's worst financial crisis since
1991, complained on Thursday that global monetary policy
coordination had broken down.
"Industrial countries have to play a part in restoring that,
and they cannot at this point wash their hands off and say: 'We
will do what we need to, and you do the adjustment you need
to,'" he said on Bloomberg India TV.