UPDATE 2-Bank of Canada says Fed tapering to be beneficial

Tue Aug 27, 2013 4:21pm EDT
 
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By Louise Egan

KINGSTON, Ontario Aug 27 (Reuters) - Eventual removal by the U.S. Federal Reserve of its massive stimulus program should be seen positively, Bank of Canada Deputy Governor John Murray said on Tuesday, responding to critics who say it will cause damage around the world.

Whenever the Fed begins winding down its unconventional monetary policy it will be in the context of a strengthening U.S. economy, Murray said, and the benefits to the Canadian economy will outweigh any risks.

"The improving underlying strength of the U.S. economy should more than compensate for the drag from higher interest rates," he said in a speech to economists. "Stronger external demand, coupled with downward pressure on our currency and support for commodity prices from a global economic recovery, will provide the lift."

Murray said interest rates will normalize as the global economy grows, "but there's no guarantee that this is going to be absolutely orderly or painless for everyone," he said in answer to a question. "But at least it's being done in the context of recovery."

The Fed has said it plans to start reducing its $85 billion-a-month purchases of U.S. Treasuries and mortgage-backed securities by yearend, with an eye toward drawing the program to a close by mid-2014. The purchases have been aimed at driving down long-term interest rates and have been credited with infusing liquidity that has benefited global financial markets.

The president of the Federal Reserve Bank of Atlanta, Dennis Lockhart, told Reuters on Saturday at the annual Jackson Hole policy retreat for the world's central bankers that Fed tapering could begin in September, provided there is not "really worrisome" economic news between now and then.

Concerns over Fed tapering have sparked an exodus of cash from emerging markets, including India and Brazil, whose currencies and stock markets have suffered steep losses in recent days.   Continued...