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Macro Afternoon

Lombard with the note:

Last Friday, Fed Vice Chair Richard Clarida reasserted the Fed’s declaration of independence of monetary policy from what other central banks are doing. In his speech “Perspectives on Global Monetary Policy Coordination, Cooperation, and Correlation.” he said — “Today I will make a somewhat different, and less often discussed, case questioning formal global monetary policy cooperation—that, in practice, adopting it could plausibly erode central bank credibility and public support for central bank instrument independence.” Clarida is Powell’s economics “consigliere”, much like Fischer was for Yellen, and this means his words matter.

The timing of his message is no accident when the Fed is readying to speed up the pace of taper to underpin the market pricing three 25bp hikes in 2022, beginning in June. There is concern among the world’s central banks about how to react to the US once again setting out to tighten global financial conditions. This concern is particularly acute among emerging market bankers.. The impact of US monetary policy on emerging markets is something Clarida readily admits in his speech – “U.S. policy rate changes attributed to U.S. inflationary pressures trigger more substantial spill overs to EM financial conditions . . . with more vulnerable EM countries experiencing larger spill overs from U.S. monetary policy.” His answer to this, other than that public support for central bank independence demands a central bank reacting to domestic concerns, is that the direction of causality runs in both directions. He cites numerous examples, beginning with the Mexican peso crisis of 94-95.

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