Germany Says U.S. Federal Reserve Heading �Wrong Way� With Monetary Easing

Bloomberg (Link) - Rainer Buergin & Rebecca Christie (October 23, 2010)

The Federal Reserve�s push toward easier monetary policy is the �wrong way� to stimulate growth and may amount to a manipulation of the dollar, German Economy Minister Rainer Bruederle said.

Fed Chairman Ben S. Bernanke yesterday gave Group of 20 finance ministers and central bankers meeting in Gyeongju, South Korea an overview of the U.S. central bank�s efforts to jumpstart the world�s largest economy. His strategy, which investors expect will soon include greater asset purchases, drew criticism at the talks, said Bruederle.

�It�s the wrong way to try to prevent or solve problems by adding more liquidity,� Bruederle told reporters yesterday, saying that emerging-market officials were among the critics. Bruederle, a member of the Free Democratic Party, the junior partner in Chancellor Angela Merkel�s government, stepped in for hospitalized Finance Minister Wolfgang Schaeuble at the meeting.

The debate over the Fed�s strategy comes as the G-20�s advanced nations sought to alleviate concerns over big swings in capital flows to emerging markets by promising to be �vigilant against excess volatility� in exchange rates. The U.S. central bank completed purchases of about $1.7 trillion of debt in March to support the recovery. The policy-setting Federal Open Market Committee next meets Nov. 2-3.

Bill Gross, Pacific Investment Management Co.�s co-founder and manager of the world�s biggest mutual fund, said Oct. 8 on Bloomberg TV the central bank may buy about $100 billion in government debt a month, or $1.2 trillion over the next year.

�Indirect Manipulation�

�Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate,� Bruederle said. The minister has taken a pro-market stance in his first year in office, criticizing state intervention in cases such as providing aid for General Motors Co.�s German Opel unit.

U.S. Treasury Secretary Timothy F. Geithner dismissed prospects of mounting criticism of the Fed�s approach in his press conference after the G-20 meeting yesterday. When asked whether he expected Germany�s criticisms to gain steam, he replied: �I do not.�

The Treasury chief declined to comment directly on the Fed�s policy, while also saying that major economies like the U.S. need to make growth a top priority. One of the global imbalances is the disparity between rapidly expanding emerging- market economies and too-slow growth in developed nations, he said.

Strengthen Recovery

�We are going to continue to try to strengthen the recovery under way so we can dig out of this as quickly as we can,� Geithner said.

European Central Bank President Jean-Claude Trichet said that the G-20 made �no particular conclusion� after some members expressed concern about proposals for further quantitative easing in the U.S.

�The remark was made that the accommodating policy vis-�-vis the U.S. might mean problems for the emerging economies, at least in terms of inflation,� he said. �The point was made that it was much more complicated than that� and that combating deflation �was also a contribution to global prosperity. It was an exchange of views, with no particular conclusion.�

Bernanke said in an Oct. 15 speech that �the risk of deflation was higher than desirable� and that U.S. inflation rates are too low. He said the central bank could expand asset purchases or change the language in its statement, without offering details on how the Fed would undertake those strategies at its November meeting. The central bank already decided in August to keep its balance sheet from shrinking.

Asset Bubbles

Low interest rates and weak recoveries in industrialized economies such as the U.S. have forced investors to flood emerging markets with capital, providing resources for growth yet also threatening to spur inflation, asset bubbles and over-valued exchange rates. Such concerns have prompted economies from South Korea to Brazil to take steps to slow the inflow of speculative cash.

�I�m not a friend of this but I can understand� why Brazil introduced capital controls, Bruederle said.

Emerging-market equity mutual funds attracted more than $60 billion this year and bond funds lured $41 billion, both on pace for record annual inflows, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based research firm. Forty nine percent of money managers are now overweight developing markets equities, the highest level since 2009, according to a BofA Merrill Lynch survey released this month. �