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Robert Blackwill has a long wait ahead

LiveMint logoLiveMint 18-09-2017 V. Anantha Nageswaran

Robert Blackwill was the US ambassador to India for two years from 2001-03. Two years ago, he and Ashley Tellis wrote a special report for the Council for Foreign Relations urging the US government to be more proactive and aggressive against China. They called upon the US to adopt policies that would balance China rather than assist in its ascendancy.

Continuing on that theme, Robert Blackwill co-authored with Jennifer Harris War By Other Means. It is an eye-opener. It has meticulously documented the use of geo-economic and cyber security tools by other nations and regrets the inability or unwillingness of the US to reciprocate in kind. One hopes that Indian policymakers read the book and note the various instances of inroads that China and Russia had succeeded in making in America’s computer networks in civilian and other areas. Blackwill and his co-author ask why America had not exploited, to its advantage, monetary policy tools given the international dependence on the US dollar.

He also questions the common view among economists and finance ministry officials in the advanced world that one should not mix politics with economics since other countries have politicized economic policy to a large extent—China couching its monetary aspirations in geopolitical terms and currency intervention driving global imbalances in recent years. In fact, late German politician Helmut Schmidt once said that monetary policy was foreign policy much more than it was domestic policy. During a visit to the German Bundesbank in 1978, he had exhorted the German central bankers to support the idea of a monetary union in Europe, making it clear that it was, above all, an issue of geopolitics.

All this assumes significance in the backdrop of the Federal Reserve Open Market Committee (FOMC) meeting this week. It is a two-day meeting and concludes on 20 September. The overwhelming consensus is that FOMC would stand pat and do nothing on the federal funds rate, which is between 1.0% and 1.25%. It had last raised the federal funds rate in its June meeting and did not change the policy rate in its July meeting. As a bulk of international borrowing in hard currency takes place in US dollars, US interest rates matter to the world. Second, Federal Reserve policy rate influences short-term interest rates, which largely influence rates in the interbank market globally.

In the last year or so, the Chinese renminbi came under depreciation pressure. China resorted, as usual, to draconian measures to avoid giving the world the impression that Chinese residents were losing faith in their currency. Capital outflows were largely eliminated and companies that were encouraged to invest abroad were investigated as to their sources and quantum of financing. In this environment, had the Federal Reserve raised interest rates at a normal pace rather than at a glacial pace, that might have complicated the task of Chinese policymakers.

Now, with China’s National Party Congress meetings approaching in October, it might be time to test the recent orchestrated economic stability in the country. Recent economic data coming out of China suggest that exports from the country are beginning to reflect the adverse impact of recent currency strength. While the Chinese government has let drop hints that currency stability would be relaxed going forward, America could test their resolve and resilience with higher dollar interest rate. China would be anxious not to let depreciation become a free fall. It might also come in handy to ensure sustained cooperation from China toward resolving the crisis in the Korean peninsula. Will the Federal Reserve be up to it? I doubt it. They still think that they should be above such petty or political considerations. Three years ago, this column wondered if the US was prepared to unleash a “controlled disintegration” of the world economy (Is Controlled Disintegration Of The World Economy On Its Way Again?, 22 September 2014). Subsequent monetary policy decisions by the Federal Reserve have revealed that it was not the case. Blackwill, evidently, regrets that attitude.

This week, the FOMC will be guided by domestic considerations. Domestic factors suggest that the Federal Reserve would stay on hold. Although the most recent inflation data for the month of August revealed the impact of hurricane Harvey on the retail price of gasoline, it is likely that FOMC members would see through it and treat it as a temporary blip. However, they may take into account that growth estimates for the third quarter have declined on account of the two recent hurricanes. In a recent research note, James Bullard, president of the Federal Reserve Bank of St Louis, has observed that low unemployment rates did not automatically mean higher inflation. He saw no reason for the FOMC to be pre-emptive about inflation. Further, with respect to financial stability considerations, discussions in the July FOMC meeting suggest that most FOMC members see no problem with expensive stock market or depressed bond yields. In other words, investor complacency and mispricing of risk is fine with them as long as higher leverage is not involved.

Finally, it is unlikely that either the current chairperson of the Federal Reserve or the potential successors under consideration have any inclination to change the current policy framework to include geo-economic considerations. In short, Blackwill has to wait.

V. Anantha Nageswaran is senior adjunct fellow (geoeconomics studies) at Gateway House: Indian Council on Global Relations, Mumbai. These are his personal views. Read Anantha’s Mint columns at www.livemint.com/baretalk

Comments are welcome at baretalk@livemint.com

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