Bernanke Says Central Banks May Differ on Timing of Tightening

Federal Reserve Chairman Ben S. Bernanke said central banks around the world will probably unwind monetary expansion at different times because of differences among their economies.

“In the medium term, like the Federal Reserve and many other central banks, the Bank of Korea will have to manage its exit from accommodative policies,” Bernanke said in pre- recorded remarks to a conference hosted by South Korea’s central bank in Seoul today. The Bank of Korea “will have to weigh the risks of a premature exit against those of leaving expansionary policies in place for too long,” Bernanke said.

The Fed chief didn’t elaborate on the outlook for the U.S. economy or monetary policy. Bernanke praised South Korea’s response to the global financial crisis over the last few years, including its decisions to reduce its policy interest rate by 3.25 percentage points and to set up a fund to keep its banking system stable.

“This suite of policy responses helped stabilize Korean financial markets and promote a swift recovery of economic activity,” Bernanke told the Bank of Korea event, according to a text distributed by the Fed in Washington.

South Korea’s stock market has erased much of its losses since late 2008, and gross domestic product has “rebounded decisively” since contracting at a 17 percent pace in the fourth quarter of 2008, he said.

Asset Purchases

In the U.S., the Fed cut its benchmark interest rate to near zero in December 2008 and purchased $1.7 trillion in Treasuries and housing debt to revive growth. Officials are debating when and how fast to raise rates and sell mortgage assets. “Because economic conditions vary, the appropriate timing of the exit is likely to differ across countries,” Bernanke said.

Countries must cooperate to improve financial regulation and ensure that firms are “well capitalized, liquid and transparent,” Bernanke said. The leadership of the Group of 20 countries is “essential” for producing effective and consistent changes, Bernanke said.

In addition, central banks “must continue to place great weight on the factors that have been shown to enhance the credibility and effectiveness of monetary policy: central bank independence, accountability and transparency, and effective communication,” the Fed chief said.