Obama defends Fed’s steps to aid U.S. economy
Tensions rose ahead of this week’s Group of 20 summit as Russia and China on Monday joined in the criticisms of the Federal Reserve’s plan to pump billions of dollars into the U.S. credit system — even as President Obama took the unusual step of defending the central bank’s action as good for the global economy.
After initially saying he wouldn’t comment on specific Fed actions, Obama then jumped into the increasingly testy international spat by saying that the Fed’s mandate, like his, is to grow the U.S. economy.
“And that’s not just good for the United States, that’s good for the world as a whole,” Obama said at a news conference in New Delhi with Indian Prime Minister Manmohan Singh.
The president’s comments came near the end of a three-day visit to India, which is part of a four-country Asia swing that includes South Korea, where he will attend the so-called G-20 summit, a meeting Thursday and Friday of the heads of the world’s 20 largest economies.
The Fed’s $600-billion bond-buying plan, announced last week, was aimed at lowering long-term interest rates and spurring more borrowing and investment. Over the weekend, Fed Chairman Ben S. Bernanke defended the bank’s decision as an effort to reduce high unemployment and spur a slow-growing economy in which inflation is running too low.
But the plan has generated substantial criticism from government officials overseas, as well as in the U.S.
The plan drew some opposition from within the central bank’s governing board. And it has been denounced by outsiders such as “tea party” movement favorite Sarah Palin, who suggested Monday that the Fed “cease and desist” from what she described as risky policies.
Some U.S. economists are concerned that pumping billions of dollars into the nation’s financial blood stream will lead to runaway inflation over the long haul.
Overseas, the concern is more immediate. A further weakening of the dollar helps U.S. exporters as their goods become cheaper and more competitive in foreign markets, but the opposite is true for producers in other countries: As their currency strengthens in comparison with the dollar, their goods become more expensive and less competitive.
The dollar already has fallen more than 6% since August when talk of further bond purchases by the Fed started to stir.
“Appreciation of currency is a cause of concern for [Brazilian] manufacturing,” said Eduardo Loyo, chief economist at investment bank BTG Pactual in Sao Paulo, Brazil. Similar concerns exist for China, Germany and other major economies that depend heavily on export sales abroad.
In addition, the Fed’s action may cause global investors to move huge amounts of cash into faster-growing economies where they can get better returns.
Officials in developing countries such as China and Brazil see risks of asset bubbles as more dollars flow in and drive up investment prices.
Brazilian officials have warned of international currency wars, and the German finance minister said that it “doesn’t add up” that the Americans complain about Chinese currency manipulation and then “with the help of their central bank’s printing presses, artificially lower the value of the dollar.”
A Chinese finance minister stepped up criticisms Monday by saying that the U.S., in launching a new round of bond purchases, was not acting responsibly and in the interests of stable global markets.
The Fed’s action has put U.S. officials on the defensive as Obama seeks support from G-20 leaders for a U.S. initiative to rebalance the global economy. That is, Obama wants major exporters, such as Germany and China, to increase domestic spending and import more goods from the U.S.
On Monday, it appeared that the Fed, and Obama, had the support of at least one major G-20 developing country, India.
“I don’t claim to have any expert knowledge of the working of the American economy,” Singh said. “But I do know one thing: that a strong, robust, fast-growing United States is in the interests of the world.”
