Janet Yellen is discovering that when it comes to providingmonetary stimulus, the Federal Reserve is damned by emergingmarkets when it does and damned when it doesn't.

Sixteen months after she used a Tokyo gathering of global policymakers to defend her institution against criticism it waspurchasing too many assets, Fed Chair Yellen attends this week'sGroup of 20 meeting in Sydney being lobbied to pay greaterattention to foreign fallout as the U.S. slows its bond-buying.

What's not changed is her response: A well-managed U.S. economybenefits the world and other central banks have tools to supporttheir own economies. That's disappointing counterparts such asIndia's Raghuram Rajan and Gill Marcus of South Africa, whocriticized the lack of a synchronized global monetary policy asdeveloping-nation currencies suffer their worst start to a yearsince 2010.

The Fed's “job is not to make policy for India, it's to makepolicy for the U.S.,” said Joseph Gagnon, a senior fellow at thePeterson Institute for International Economics in Washington and aformer Fed economist. “Blaming other people for their problemsisn't very helpful.”

Almost three weeks since taking the helm of the Fed, Yellen, 67,makes her international debut as its chief when she joins fellowG-20 finance ministers and central bankers at the Feb. 22-23 talks.They meet in the wake of a decline in emerging-market currencies and shares on concernover softer economic growth.

Blamed in part for the sell-off and need for interest-rateincreases from Brazil to India is the Fed's decision of December to pull back its $85billion-a-month asset purchase program, which ithas since lopped to $65 billion. U.S. monetary policy will bepart of the debate in Sydney, G-20 officials say.

The recent volatility doesn't pose a “substantial risk to theU.S. economic outlook,” Yellen said on Feb. 11, signaling thetapering will continue. The U.S. central bank sets policy “topursue our goals that Congress has assigned,” she said.

In an accompanying report, the Fed described the rate increasesin emerging markets as “stopgap measures” that should be coupledwith fiscal and structural changes “to help remedy fundamentalvulnerabilities.”

Response Threshold

The Fed will react only if the emerging-market woes start “tohave a more meaningful impact on monetary conditions and/orgrowth,” in the U.S, said Dario Perkins, director of globaleconomics at Lombard Street Research Ltd. in London and a formerU.K. Treasury official. “In the absence of such weakness, the Fedwill continue to taper.”

That may irk some of Yellen's G-20 counterparts. Reserve Bank ofIndia Governor Rajan told Bloomberg News on Jan. 30 thatinternational monetary cooperation “has broken down.” He saiddeveloped countries can't “wash their hands off and say we'll dowhat we need to and you do the adjustment.”

Marcus, who has led South Africa's central bank since 2009, saidin a Feb. 3 interview that it's in the Fed's interest to ensureless turbulence in developing nations.

“Statements that we need to more explicitly coordinateinternational policy are a bit overblown compared to where realgains would be from doing that,” St. Louis Fed President JamesBullard told reporters in Washington yesterday.

“So as long as every country pursues its own monetary policy forits own purposes and does a good job at that, you get a pretty goodglobal equilibrium that isn't too far from the one that you wouldget if everyone was under the same monetary policy or was perfectlycoordinating monetary policy,” he said.

While Fed policy makers didn't mention emerging markets in theirlast policy statement, officials agreed the unfolding events inemerging markets “needed to be watched carefully,” minutes of theirJanuary meeting released yesterday show.

“Recent volatility in emerging markets appeared to have had onlya limited effect to date on U.S. financial markets,” according tothe record of the gathering. “It was also noted that recentdevelopments in several emerging market economies, if theycontinued, could pose downside risks to the outlook.”

Fed policy makers backed away from their year-old commitment toconsider raising interest rates when unemployment falls below 6.5percent. With the jobless rate falling faster than expected even asother labor-market indicators show weakness, policy makers agreedit would “soon be appropriate” to revise their guidance about howlong the era of low interest rates will remain, the minutesshowed.

Recovery Risk

Risks of prolonged market turmoil in emerging markets and ofdeflation in the euro area are threatening the world's improvedeconomic prospects, according to the International Monetary Fund.In a staff report prepared for central bankers and financeministers from the G-20, the IMF said the recovery is still weakand “significant downside risks remain.”

For Stephen Cecchetti, a former economic adviser to the Bank forInternational Settlements, the lesson is that monetary policycannot be relied upon alone to fix economic weaknesses andgovernments must do more. That will be a theme of the Sydneymeeting too as Australia pushes infrastructure investment as a wayto spur jobs.

Other measures might come from trade liberalization, reducingwasteful subsidies, curbs on state-owned companies or simply beingmore open to foreign investment, said Frederic Neumann, co-head ofAsian economics research at HSBC Holdings Plc in Hong Kong.

Goldman Sachs Group Inc. told investors in December that a lackof economic reforms meant they should cut allocations in developingnations by a third, predicting a “significant underperformance” forstocks, bonds and currencies over the next 10 years.

Countries which did take advantage of capital flows to revamptheir economies, such as Mexico and South Korea, are now in bettershape and show what can be achieved, according to William Rhodes,senior adviser to Citigroup Inc.

“Recent market events should be an incentive to emerging-marketcountries to put in place structural reforms quickly,” said Rhodes,who is now president and chief executive officer of William R.Rhodes Global Advisors LLC in New York.

Blame Game

Less than two years ago, the Fed's asset purchases were blamedfor encumbering emerging nations with speculative capital andpushing up their currencies, making exports more expensive.

As Fed vice chairman at the time, Yellen's response was to tella meeting of the IMF in October 2012 in Tokyo that “on balance,stronger U.S. growth is beneficial for the entire globaleconomy.”

That line was echoed on Jan. 31 this year by Federal ReserveBank of Dallas President Richard Fisher, who said: “If we'restrong, others will benefit from it.”

European Central Bank President Mario Draghi reinforced the ideathat it is up to each institution to keep its house in order. “Thepriority for all of us is the compliance with our mandate,” he saidon Feb. 6 in Frankfurt.

The following week, Australian Treasurer Joe Hockey said theworld “can no longer rely on methadone every day” from easy U.S.monetary policy and that central banks must act in their nationalinterests.

Overblown Concerns

Some recent academic research suggests the concerns indeveloping nations may be overblown. A January study by KristinForbes of Massachusetts Institute of Technology's Sloan School ofManagement found that for all the complaining, U.S. interest rateshad only a 12 percent correlation with private capital flows toemerging markets from 1990 to 2013.

Not all agree the Fed is blameless. John Taylor, a formerUndersecretary at the U.S. Treasury and now a professor at StanfordUniversity, said in a July paper that the Fed and other leadingcentral banks should return to the rules-based monetary policy ofthe 1980s and 1990s, which generated a form of coordination.

Neil Mackinnon, a global macro strategist at VTB Capital Plc inLondon, wrote in a Feb. 17 note that any deterioration ininternational monetary cooperation will probably provoke “anincrease in protectionism, an increase in capital controls and aretreat into economic isolationism.”

For all sides, the G-20 meeting will allow a clearing of theair, said Pier Carlo Padoan, chief economist at the Organizationfor Economic Cooperation and Development, who will be inSydney.

“We need more exchange of information, we need moreconsideration especially among large central banks about theimpacts of what they're doing,” Padoan said in an interview. “Thereis one place where that can take place, which is the G-20meeting.”

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