Rebalancing Monetary Policy and the G20 Agenda

• Yesterday’s meeting of the G20 finance ministers in China broadened the ongoing “rebalancing current accounts” agenda to consider international monetary policy reform. But few central bank governors came so an important monetary policy issue could not be discussed: the international rebalancing of monetary policy.


• The Central Bank Watch Table released today by the economic forecasters at JPMorgan Chase illustrates this imbalance. The table gives the policy interest rate at the major central banks around the world and a forecast of future rates based on a combination of formal economic analysis and listening to central bankers. The table is quite long so I show a small section here for the western hemisphere countries. The shaded part of the table is the quarterly forecast from June 2011 to June 2012.

• If you click on the whole table you see an amazing thing: The United States is the only country in the world, aside from troubled Japan and dollar-pegged Hong Kong, whose central bank is listed as “On hold” which means not expected to increase the interest rate until June 2012 or later. So there's an imbalance.


• Now, just as with current account imbalances, one can say that there are good monetary policy imbalances and bad monetary policy imbalances. In current circumstances the low interest rate in the United States makes it harder for other central banks to combat rising inflation without possibly creating damagingly large appreciations of their currencies. It is not simply a China issue. Many emerging market central bank's feel the pressure and are intervening or talking about intervening, or even imposing capital controls. What is right for the U.S. is under some dispute now, and the disagreement is showing up in remarks by Fed presidents this week. The Taylor Rule says the rate should already be higher.


• The IMF is now busy putting together the indicators of current account imbalances for their Mutual Assistance Process (MAP) for consideration when G20 and other countries meet in Washington later this month. Since the central bank governors will be there this time, it would be a good idea to put this table of monetary policy imbalances on the agenda for discussion.