World Bank chief says Fed can reduce taper risk with communication

WASHINGTON -- Clear communication from Federal Reserve officials could reduce the risk to developing economies when the central bank starts reducing a key stimulus program, the head of the World Bank said.

Developing nations saw their borrowing costs increase this year as Fed Chairman Ben S. Bernanke and other policymakers began talking about tapering their bond-buying program in the spring and summer.


In September, Fed policymakers surprised many analysts and decided not to start reducing the $85 billion in monthly bond purchases. But improving economic data have led to speculation a reduction could come as soon as next week's Fed meeting.

World Bank President Jim Yong Kim said this week that he believed Bernanke and Fed Vice Chair Janet L. Yellen, who is awaiting Senate confirmation to take over as Fed chair,  "are very much aware of the impact that any change in the U.S. economy has on...borrowing costs in developing countries."

Those costs rose about 0.5 percentage points this year and are expected to rise another percentage point once the Fed begins tapering, Kim said. The impact on the world economy would be offset by stronger growth in the U.S.

As long as the Fed reduces the purchases gradually and clearly explains its plans, the effect on growth in developing nations should be muted, he said.

"Growth in the United States is positive for the global economy, and so if the tapering is communicated effectively and if the tapering is gradual, which we hope it will be, then the impact of a growing U.S. economy will help to offset the impact of rising interest rates," Kim said Tuesday at the Economic Club of Washington.

The global economy still faces "many downside risks," he said.

But Kim said the outlook for the U.S. economy was good after the Labor Department reported last week the nation added 203,000 net new jobs in November and the unemployment rate fell to a five-year-low of 7%.

"The jobs numbers were very encouraging, and as long as the Congress can resolve this budget issue, we think that the growth prospects for the U.S. are quite good."