Don’t Cry for Me, Ben Bernanke

WASHINGTON, DC – Financial volatility since Federal Reserve Chairman Ben Bernanke’s announcement in May that the Fed would “taper” its monthly purchases of long-term assets has raised a global cry: “Please, Mr. Bernanke, consider conditions in our (non-US) economies when you determine when to end your quantitative-easing policy.”

That is not going to happen. The Fed will decide on monetary policy for the United States based primarily on US conditions. Economic policymakers elsewhere should understand this and get ready.

It is true that, in recent years, the Fed has shown more concern about financial conditions in other parts of the world. In the fall of 1998, then-Fed Chairman Alan Greenspan favored lowering interest rates, in part because of the emerging-markets crisis in Asia and Russia. For those efforts, he got his picture on the cover of Time magazine as part of the so-called “committee to save the world.”

More recently, the Fed extended credit – known as “swap lines” – to a select number of emerging markets and, most importantly, to the European Central Bank. The problem in the eurozone from 2007 on was that some of Europe’s largest banks had borrowed heavily in dollars and, when credit conditions tightened, could not easily obtain the dollars needed to continue funding their operations. Without question, the Fed has greatly helped the European banking system to stay afloat.