Tags: Lagarde | US | monetary | policy

IMF's Lagarde Speaks Amid Turmoil

By    |   Friday, 16 January 2015 07:55 AM

International Monetary Fund Managing Director Christine Lagarde spoke to the Council on Foreign Relations in Washington Jan. 15 to present her annual outlook for the global economy.

Coincidentally, her speech coincided with a surprise move by the Swiss National Bank, Switzerland's central bank, to drop its accommodative policy and allow the Swiss franc to float upward, putting pressure on weaker currencies and possibly creating a "Buffett moment," when the tide goes out and some bankers and fund managers are revealed to be wearing "nothing but net" — the federal safety net, relying on the "Yellen put," formerly known as the "Bernanke put" and the "Greenspan put."

On the effect of low oil prices on global growth, Lagarde expressed a positive view of the price drop as pro-growth, then turned to her forecast for the U.S. economy. She predicted that a strong 2014 would continue into 2015, due to strong household spending, declining unemployment, again a boost from cheaper oil and "continued support for accommodative monetary policy."

However, there is a catch, and it is almost a relief that she said this, because readers and viewers presumably suspect this. She stated forthrightly the, "The oil price and U.S. growth are not a cure for deep-seated problems elsewhere." Those are legacy problems from the financial crisis, including high debt and unemployment, as companies and households cut back on consumption and investment out of concern over the outlook for economic growth, with the U.S. and perhaps the U.K., standing out as the only major economies likely to grow this year.

Using cosmic analogies, Lagarde spoke of headwinds and meteorites coming at the global economy. A major source of risk is "asynchronous" monetary policy, and at some point this remark would be placed against the Swiss action on that day. This was ironic, because what she was actually referring to was the Federal Reserve's announced plan to exit highly accommodative policy versus a pending move by the European Central Bank to move in the opposite direction, becoming more accommodative, while Japan maintains its existing accommodation. She praised Fed Chair Janet Yellen as "talented and communicative" but predicted that capital flows would be volatile nonetheless due to the asynchronous policies of the monetary authorities taken together.

Lagarde cited as an area of risk the possibility that the eurozone and Japan could remain stuck in what she calls "low-low," low growth and low inflation. Some American pundits are predicting the same for the U.S. unless they think, as this writer has, that the future is low-high, or "snagflation," the single policy outcome the U.S. government can deliver without any extraordinary effort. She set forth a formula for policymakers to deliver higher growth and employment through accommodative monetary policies, fiscal policy and structural reform.

A major structural issue, and perhaps the most practical is a gender agenda that the G-20 has adopted that would reduce the gap in employment of women versus men by 25 percent by 2025, and she looks to trade agreements now pending as a means to advance this effort that could bring an additional 100 million women into the labor force. She added later that at the end of the day it has to be demonstrated that this makes economic sense.

Lagarde spoke out for addressing "too big to fail" banks as a necessary means of making the financial system sustainable as part of a sustainable global economy. However, she fell into the trap of stressing so-called "shadow" banking as "a nest of unpredictable hazards."

Areas she listed as in need of attention are Basel capital rules, derivative rules and the ethics of the industry, the last an unusual topic to discuss, and she raised it within the context of pending jury trials over the manipulation of LIBOR interest rate benchmarks.

(A copy of the speech and archived video can be found here.)

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International Monetary Fund Managing Director Christine Lagarde spoke to the Council on Foreign Relations in Washington Jan. 15 to present her annual outlook for the global economy.
Lagarde, US, monetary, policy
Friday, 16 January 2015 07:55 AM
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