A Fed retrospective: Al Broaddus, until recently Chairman of the Richmond Federal Reserve Bank, tackles the bond market, inflation targeting, and Chinese capital flows. A TIE exclusive interview

International Economy, The,  Fall, 2004  

Tags: bond, exclusive interview, Federal Reserve Bank, Federal Reserve Board, inflation

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TIE: The other day a senior Democratic official involved with the Kerry campaign said that the U.S. current account imbalance is out of control, approaching 6.5 percent of GDP, and the budget deficit is also out of control, but the only reason these twin deficits have not yet produced problems such as a dollar crisis and dramatic, abrupt rate hikes from the Fed is that the Chinese and the Japanese have been heavily buying U.S. Treasury bonds. The implication was that the Asians made sure George Bush got reelected. This is obviously overdone, but is there a sense that the Treasury market has been helped along by foreign governments interested in propping up the dollar?

Broaddus: The capital inflow from the Chinese and other central banks has helped make it possible for this imbalance in the world economy and in global capital markets to persist without huge damage. But what if the Chinese suddenly decided they weren't going to buy Treasuries any more? The Chinese currency would appreciate, which would help cure the current account imbalance. Especially in the political arena, pundits will pick out some one aspect of this imbalance like the U.S. current account deficit and talk about it like it floats out there by itself. But broader adjustments in the international economy would happen simultaneously that would tend to cushion the shock and deter a major crisis unless we made some huge policy mistake.

TIE: Many analysts don't seem to realize how dollarized the world economy is today. If we get a cold here in the United States, the rest of the world is probably going to get pneumonia. Financial integration is tremendously significant.

Broaddus: That's right. The multiple adjustment paradigm is a way that helps me to think about these things. The fact that the United States has a big imbalance on its current account means that there's other imbalances elsewhere in the system. If suddenly the imbalance in our current account goes away, it's going to mean that something is happening elsewhere in the world that will hopefully attenuate the impact on the U.S. economy. So I don't lose sleep over this. I hope I'm not overconfident about this.

TIE: Like you said, if the Chinese were to stop buying U.S. Treasury bonds overnight, and let their currency rise sharply, then they would quickly shut down their own economy.

Broaddus: Correct. The likelihood the Chinese will decide to stop buying Treasuries abruptly strikes me as small.

TIE: The final question is one you probably won't answer. Who's going to be the next Fed Chairman?

Broaddus: [Laughter] I don't know. That's a key question. It's interesting that the chairmanship of the Fed was not much of an issue in the presidential campaign. Nominees to the Supreme Court were an issue, but not much was seen in the popular press about how the election might impact who the next Chairman would be to me a huge issue. We've had two great chairmen in my opinion since 1979--great in different ways--who've led the Fed with distinction. We need somebody who can do that--I don't know whom--but I expect that both the Administration and the Congress will give it careful consideration.