Sunday, May 31, 2009

The Federal Reserve sees the rise in yields as part of a bumpy normalisation process

TO BE NOTED: From the FT:

US and China eye economic co-ordination

By Krishna Guha in Washington and Geoff Dyer

Published: May 31 2009 18:44 | Last updated: May 31 2009 18:44

Tim Geithner, US Treasury secretary, begins two days of top-level economic talks in Beijing on Monday amid a tightening focus on the need for the US and China to co-ordinate their exit strategies from the financial crisis.

Tim Geithner, US Treasury secretary
Hands-on approach: Tim Geithner, US Treasury secretary, said the US was committed to a strong dollar and reducing the fiscal deficit
With the US and China expected to lead the world out of recession, much rests on their ability to manage financial, trade and currency tensions while laying out mutually consistent frameworks for recovery.

The China talks follow recent weakness in the dollar and a surge in bond yields that partly reversed on Friday.

The Federal Reserve sees the rise in yields as part of a bumpy normalisation process, and is not inclined to be bounced into any immediate policy reaction, but is monitoring market developments carefully.

“The two countries are getting locked into an increasingly tight embrace,” said Eswar Prasad, a professor at Cornell University.

The US wants China to boost domestic demand in a way that will make it easier for the US to withdraw fiscal and monetary stimulus. China is worried about the value of its roughly $1,400bn in dollar assets and wants reassurance on US fiscal discipline as well as protectionism.

“We have lent a huge amount of money to the United States,” Wen Jiabao, China’s premier, said earlier this year. “Of course we are concerned about the safety of our assets.”

Any overt discord in the talks could rattle the bond and currency markets. Even if this can be avoided, the two nations face a tough challenge agreeing how to reconcile short-term counter-cyclical policies with the longer-term need for both countries to change their growth models. These are characterised by a focus on consumer spending in the US, and exports and infrastructure investment in China.

This will be a key theme of Mr Geithner’s speech in Beijing.

Many US-based analysts see China’s stimulus plan as offering more of the same. However, Nicholas Lardy, a fellow at the Peterson Institute, disagrees. “They have become more serious about rebalancing,” he said. “But it is a long-term process.”

China has vented its frustration over its exposure to the US – and pushed back against criticism – by floating suggestions to reduce reliance on the dollar.

Mr Geithner will stress the US desire for China to gain influence in multilateral economic debates in the hope that this will assuage China’s dissatisfaction at the current economic order."

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