Focusing only on direct channels, the effects that one would expect to ripple back to the United States from problems in one or two EMEs typically look quite small. But, when all of the indirect channels of feedback are aggregated properly – which admittedly is difficult to do – the effects may be considerably larger. My point is that we tend to underestimate these feedback effects. For most of us, the market volatility of this past spring and summer still remains fresh in our minds. EME financial markets were hit hardest, with declines in equity prices, a widening in sovereign debt spreads, and a sharp increase in foreign exchange rate volatility. In the U.S., we saw a spike in Treasury yields, with 10-year rates rising by roughly 100 basis points from early May to early July, and rising by roughly another 30 basis points before peaking in early September. Most commentary has focused on the shift in expectations with respect to U.S. monetary policy – and, in particular, to uncertainty about the timing and implications of Fed tapering – as the catalyst for these moves. This focus seems generally right, although other factors also played a role. Market participants also had to evaluate the possibility that growth in China and other EMEs might be slowing even as growth in the U.S. and other advanced economies  BIS central bankers’ speeches  1  was picking up.
Moreover, our last system of explicit coordination – the system of fixed exchange rates under Bretton Woods – broke down for a reason. Monetary policy meant to suit everybody is likely in the end to suit nobody. Similar considerations underlie the widespread move in the emerging world away from fixed exchange rate regimes. Policymakers worldwide have learned that a framework capable of responding in a disciplined but flexible manner to changing domestic conditions works best over the long run. While explicit coordination looks neither feasible nor desirable, there is more that central banks in general, and the Fed in particular, could do to be better global stewards. One thing recent events demonstrate is the importance of effective Fed communication. It is clear in retrospect that our attempts last spring to provide guidance about the potential timing and pace of tapering confused market participants. In particular, markets seemed to conflate tapering with monetary policy tightening and raised their expected paths for policy rates. Lately, we seem to have done better: markets now seem to understand that policy rates will likely remain exceptionally low for a considerable period of time even after tapering is completed. As you know, we’ve taken a number of steps in recent years to increase transparency and improve our communications.