“If you can foresee an environment of a slower-moving Fed, then that is favorable for emerging markets,” he said.
Structural Change
The next Fed chairman also will witness a world economy coping with structural change, according to Barry Eichengreen, a professor at the University of California-Berkeley, where Yellen once taught. He argues that what he calls “international variables” again will influence the two indicators -- inflation and unemployment -- that the Fed is tasked with controlling.
Globalization will force the U.S. to become more open to trade and financial transactions, while emerging markets will eat into its share of the global economy even if they slow for now, in his view. More controversially, Eichengreen says the dollar will be challenged as the chief reserve currency, although that will occur over many years as the euro and yuan attract increasing demand.
The U.S. current-account deficit already has halved to about 3 percent of gross domestic product since 2005, while the IMF projects that by 2018, the U.S. will be responsible for 21.6 percent of global GDP, down from 30.8 percent in 2000.
China Growth
By 2027, China will have overtaken the U.S. as the largest economy in terms of market exchange rates and be more than 20 percent bigger by 2050, with India and Brazil also closing in, according to a January study by PriceWaterhouseCoopers LLP. The report estimated emerging markets will grow 4 percent a year from 2011 through the next four decades, almost double the U.S. pace.
“The biggest story in the global economy is the rise of Asia and other emerging markets,” said St. Louis Fed President James Bullard in a Sept. 20 interview. “So these are all factors that change the complexion of monetary-policy making in the U.S. over time.”
Paying attention overseas also is important because of the need to ensure financial stability when trouble in one country can be transmitted elsewhere through markets, according to Mark Gertler, who teaches economics at New York University. He sees central banks having to ensure common regulatory regimes or risk distorting capital.
“We live in a global world, and it’s important to account for that in policy,” said Gertler, who has written papers with Bernanke.