Mexico’s Carstens hails Fed’s communication on tapering

Augustin Carstens says Fed has ‘gone out of its way’ to spell out timing and dangers of adjustment; calls on Europe and Japan to ‘depend less on monetary policy’
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The Federal Reserve has "gone out of its way" to make clear the likely timing and dangers of US monetary policy normalisation, Bank of Mexico governor Agustín Carstens argues in an interview published in Central Banking journal today.

"I support the normalisation of policy," Carstens says - adding ultra-loose monetary policies can provide a window of opportunity for structural reform, but are "not a long-term solution".

"If it is perceived that accommodative monetary policy will be there forever it will prevent fiscal adjustments and the introduction of tougher regulation," Carstens says. "Central banks have some very powerful instruments... [but] when they are not needed, you have to remove them."

Carstens adds that the Fed has made extraordinary efforts "to spell out what the adjustment might be and what the dangers are" of normalisation. "I trust the Fed will find an appropriate way to unwind its extraordinary policies," he says. "It is difficult to request anything more."

Structural reform needed in Europe and Japan

If it is perceived that accommodative monetary policy will be there forever it will prevent fiscal adjustments and the introduction of tougher regulation

Carstens also urges Europe and Japan to implement growth-friendly structural reforms and "depend less on monetary policy". "The call from Australia to implement a system where peer pressure can be applied on countries to ensure structural reform is very important," he argues, referring to an initiative being undertaken by the G-20 under Australia's leadership this year.

"If we can engineer higher global growth, that will ease many of the constraints that countries face," Carstens says. "Mexico is already doing that."

He argues the Mexican economy was able to avoid the two major waves of capital outflows from emerging markets in the past 14 months partly due in part to a fiscal responsibility law that has helped preserve the sustainability of public debt.

Carstens adds that Mexico's flexible exchange rate and "very high level of international reserves" has helped the country to adjust to outside shocks.

"When the [Fed] tapering talk started [last April]... some countries, certainly weaker than Mexico, had to resort to very strong intervention in the forex market," he says. "During this time, we were one of the few emerging markets that did not have to intervene at all in the foreign exchange market. Not only did we not use our international reserves, but we accumulated more reserves."

Carstens also warns of growing risks in the shadow banking sector. "We still do not have full information about shadow banking in many developed as well as emerging market constituencies," he cautions. "Some countries lack sufficient granular information about their money market mutual funds, finance companies, structured finance vehicles, hedge funds, private equity funds and trust companies."

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