In the U.S., we saw a spike in Treasury yields, with the 10-year rate rising by more than 100 basis points from early May before peaking in early September. Most commentary about this period 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 to me, although other factors also played a role. 1  1  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 was picking up. The subsequent market movements as investors withdrew funds from EME investments were an abrupt shock for these EMEs generally, especially after the long earlier period of abundant liquidity and ample inflows. BIS central bankers’ speeches  1  From one perspective, the unconventional nature of recent U.S. monetary policy adds little that is fundamentally new to the challenges that face the EMEs. These policies simply represent a way of easing, necessitated by our coming up against the zero lower bound. Central bankers have managed differences across countries in cyclical positions and policy stances many times in the past. This time should not be fundamentally different. But, from another perspective, we have less experience operating with unconventional monetary policy, and this creates more potential uncertainties.
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. As an example, recent events demonstrate the importance of effective Fed communication. It is clear in retrospect that our attempts in the spring of 2013 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 now that the asset purchase program has been completed. As you know, we’ve taken a number of steps in recent years to increase transparency and improve our communications. This includes regular press conferences following Federal Open Market Committee (FOMC) meetings by the Fed chair; the publishing of growth and inflation forecasts of FOMC participants; and a concerted attempt to lay out the guideposts that the FOMC will look at to assess progress toward our mandate. We are, though, still learning how to more effectively communicate, especially given our new and expanded set of policy instruments. A second area in which we can and must do better is safeguarding financial stability. Simply put, we failed to act both early enough and decisively enough to stem the credit excesses that spawned the financial crisis and the Great Recession.