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Opinion

October 11, 2013

When Ben Bernanke speaks, the world listens — and pays for it

WASHINGTON — Words can be expensive, and in the case of Federal Reserve Chairman Ben Bernanke, the price tag is about $12.6 billion each for the 32-word comment he uttered in May to indicate the coming end of the era of loose money.

Officials at the International Monetary Fund are nervous that a shift of Fed policy may wreck the economies of one or more countries around the world. In the latest of a series of papers on the topic, the IMF on Monday estimated that $404.4 billion fled from global bond and stock investments when Bernanke said at a congressional hearing: "If we see continued improvement, and we have confidence that that is going to be sustained, in the next few meetings we could take a step down in our pace of purchases."

The May and June "taper panic" gave a brief empirical peek at how markets might react to the end of the Fed's monthly bond purchases — and at how statements by Bernanke may shape that response.

The results aren't pretty.

"We have always been concerned there would be turbulence" when the world's main central bank decides that the crisis is enough in the past that it can stop the extraordinary asset purchases and other efforts made to sustain the economy, said Karl Habermeier, assistant director of the IMF's monetary and capital markets department. "What happened was not what we wanted or hoped for."

The timing and nature of the Fed's exit from "quantitative easing" will be a central topic when the IMF holds its annual meetings this week. The agency has no direct sway over national policy, but it is hoping that the Fed will calibrate what it does — how fast it pulls back monthly bond purchases, how much of its asset stock it sells, when it raises interest rates — with the rest of the world in mind.

Fed policy was recently criticized by officials from places such as Brazil for pushing so much money into the system that it was producing inflation, asset bubbles and currency appreciation in parts of the world. Now it is feared that the Fed's transition to a post-crisis world will lead to a rush of money in the opposite direction.

The IMF's job is to identify and analyze those risks. It is rare, however, that it can trace them back to a single person. Bernanke isn't mentioned by name in any of the documents, but the IMF has focused on the importance of deft communication — as much as proper policy — in order to "contain instability" when crisis-era programs come to an end.

Bernanke's comments, delivered during the question-and-answer session of a congressional hearing rather than as scripted guidance about economic conditions and policy, are an example of what the IMF hopes does not happen again. The Fed has since sprung another surprise, when it did not start the taper in September as expected.

Meanwhile, the world waits.

A Fed withdrawal from its quantitative-easing program of monthly bond purchases would be premised on a strengthening U.S. economy — in general a good thing for the world. But it would also point to an eventual rise in U.S. interest rates as economic conditions return to normal.

That would touch off a broad reevaluation of global economic conditions, particularly as large investors try to decide whether it makes sense to continue holding stocks or bonds in developing nations if there are reasonable and less risky returns to be had in the United States.

A general rise in interest rates would also mean a decline in the value of bond holdings around the world, damaging the value of portfolios held by banks, insurance companies, pension funds and other large pools of money — a potentially disruptive fallout.

In examining what happened following Bernanke's comments in May and a similar statement in June, the IMF documented a substantial rise in interest rates in Brazil, where monetary conditions are tightly tied to what the Fed does. It found sharp drops in the capital flowing even to developed countries such as Australia.

And it exposed potential weaknesses in countries such as Indonesia and India — star economic performers in recent years, but dependent on a steady flow of capital from around the world.

"We have to recognize that there is considerable uncertainty with a number of countries and how they will fare" when the Fed shifts gears, Habermeier said.

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