ID :
184561
Thu, 05/26/2011 - 10:57
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Shortlink :
https://oananews.org//node/184561
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End of Fed's bond-buying program not to impact global markets much: professor
(LEAD)SEOUL, May 26 (Yonhap) -- The Federal Reserve's planned end of a US$600 billion asset-buying program is not likely to have much impact on the United States and emerging financial markets, a U.S. professor said Thursday.
Volatility of global financial markets has increased ahead of the expected end of the second round of the quantitative easing, known as the QE2, at the end of June.
Barry Eichengreen, a professor at the University of California, Berkeley, said the size of the asset purchase is "relatively small," given the scale by U.S. financial markets.
"(The QE2) was an insurance policy against deflation. But the global financial landscape has changed ... and a lot of people are worried about inflation rather than deflation," Eichengreen said in a group interview with reporters. He is visiting South Korea to participate in a conference on the global financial system hosted by the Bank of Korea (BOK).
Eichengreen said as concerns about inflation risks have risen, it is "entirely logical" that the QE2 will end, but its impacts are widely expected to be limited on the global financial markets.
"But things could be different when the Fed begins to raise its policy rate. That could have potentially significant impacts on U.S. financial markets and on capital flows from the U.S. to emerging markets. But I don't expect the Fed to begin to move until next year."
BOK Gov. Kim Choong-soo said earlier that it is too early to comment on whether foreign capital could flee the Korean market following the end of the QE2 as there is high uncertainty.
But Kim said there would be no issue more important than the fallout of the planned end of the quantitative easing, which warrants being closely watched.
Meanwhile, Eichengreen raised a question about the necessity of simply raising the foreign exchange reserves as a shield from external shocks.
He said simply accumulating the foreign reserves was found to not be enough to tackle the global financial crisis, saying that hoarding the reserves could increase foreign exposure and risk-taking by banks.
South Korea's foreign reserves surpassed the $300 billion mark for the first time in April amid strong exports and sustained foreign buying of Korean assets, sparking controversy over the appropriate size of the reserves.
He said in addition to accumulating foreign reserves, it is important to seek financial stability by limiting foreign exchange exposures or other risks in the financial system, adding that there has been "important progress" in the way that South Korea has sought to enhance financial stability.
South Korea has been stepping up efforts to smooth excessive cross-border capital flows as small open economies like Korea have had to undergo the repetition of excessive cross-border capital flows whenever big external shocks hit.
Last week, South Korea unveiled its plan to further lower the ceiling on foreign exchange derivatives positions held by local and foreign banks by 20 percent in an effort to curb the country's growing short-term debt. The government also plans to impose a levy on banks' non-deposit foreign currency borrowings starting in August.
"I think capital controls have a role as a form of prudential supervision and regulation ... when conventional tools are not strong enough or when they (countries) are being overwhelmed by a tsunami of capital coming from abroad," Eichengreen said.
He added the U.S. dollar will remain the single most important currency in the foreseeable future as the U.S. is still the world's largest economy and has the most liquid financial markets.
But the professor warned that the U.S. could lose confidence from global investors if the country is not able to raise its debt ceiling and enhance its fiscal soundness.
Volatility of global financial markets has increased ahead of the expected end of the second round of the quantitative easing, known as the QE2, at the end of June.
Barry Eichengreen, a professor at the University of California, Berkeley, said the size of the asset purchase is "relatively small," given the scale by U.S. financial markets.
"(The QE2) was an insurance policy against deflation. But the global financial landscape has changed ... and a lot of people are worried about inflation rather than deflation," Eichengreen said in a group interview with reporters. He is visiting South Korea to participate in a conference on the global financial system hosted by the Bank of Korea (BOK).
Eichengreen said as concerns about inflation risks have risen, it is "entirely logical" that the QE2 will end, but its impacts are widely expected to be limited on the global financial markets.
"But things could be different when the Fed begins to raise its policy rate. That could have potentially significant impacts on U.S. financial markets and on capital flows from the U.S. to emerging markets. But I don't expect the Fed to begin to move until next year."
BOK Gov. Kim Choong-soo said earlier that it is too early to comment on whether foreign capital could flee the Korean market following the end of the QE2 as there is high uncertainty.
But Kim said there would be no issue more important than the fallout of the planned end of the quantitative easing, which warrants being closely watched.
Meanwhile, Eichengreen raised a question about the necessity of simply raising the foreign exchange reserves as a shield from external shocks.
He said simply accumulating the foreign reserves was found to not be enough to tackle the global financial crisis, saying that hoarding the reserves could increase foreign exposure and risk-taking by banks.
South Korea's foreign reserves surpassed the $300 billion mark for the first time in April amid strong exports and sustained foreign buying of Korean assets, sparking controversy over the appropriate size of the reserves.
He said in addition to accumulating foreign reserves, it is important to seek financial stability by limiting foreign exchange exposures or other risks in the financial system, adding that there has been "important progress" in the way that South Korea has sought to enhance financial stability.
South Korea has been stepping up efforts to smooth excessive cross-border capital flows as small open economies like Korea have had to undergo the repetition of excessive cross-border capital flows whenever big external shocks hit.
Last week, South Korea unveiled its plan to further lower the ceiling on foreign exchange derivatives positions held by local and foreign banks by 20 percent in an effort to curb the country's growing short-term debt. The government also plans to impose a levy on banks' non-deposit foreign currency borrowings starting in August.
"I think capital controls have a role as a form of prudential supervision and regulation ... when conventional tools are not strong enough or when they (countries) are being overwhelmed by a tsunami of capital coming from abroad," Eichengreen said.
He added the U.S. dollar will remain the single most important currency in the foreseeable future as the U.S. is still the world's largest economy and has the most liquid financial markets.
But the professor warned that the U.S. could lose confidence from global investors if the country is not able to raise its debt ceiling and enhance its fiscal soundness.
