Please look beyond the White House for just a few minutes, Asia. The place that matters most for you right now is the Marriner S. Eccles Federal Reserve Building, a few blocks away on Constitution Ave.
Don’t let the obscurity of the address fool you. From inside these walls a massive exercise in financial stabilization provided the most important foundations for Asia’s economic rebound from the coronavirus-induced slump. By flooding world markets with liquidity and easing a shortage of dollars to key nations, the Fed bought policy makers vital time to plot their response to the pandemic. Without these benign conditions, it’s hard to imagine that places like Indonesia, the Philippines and South Korea would have been able to expand their budgets so greatly. Countries could have been forced into bailouts from the International Monetary Fund.
When observers in Asia talk about US elections, the conversation quickly becomes an exercise in navel-gazing. That tends to mean expressions of disapproval at Donald Trump’s tariffs on Chinese-made goods, wariness about curbs on technology investment or lamentations that Beijing has stolen Washington’s march on the South China Sea. Yes, these are big issues. But they haven’t made the difference between economic resilience and something worse. That hinge point has been the Fed.
The Fed’s brawn doesn’t stem directly from the ballot box. Few in Asia appreciate this exercise in the US’s raw financial muscle. At a five-hour election-watch event in Singapore hosted by the American Chamber of Commerce on Wednesday, the Fed barely registered. When it seemed Trump was pulling ahead, the mood in the audience turned dour. Conversation focused on trade wars, the politics of mask-wearing (in Singapore, it’s compulsory), regulatory enforcement and who might occupy cabinet jobs like secretaries of state, defense and treasury for the next four years.
Quantitative easing, swap lines and the ability to borrow against assets held at the Fed aren’t as sexy as aircraft carriers or as tangible as a more expensive smartphone. Asia’s monetary system, however, depends on the stability of the greenback. Currencies are mostly priced against the buck; more than a few countries have soft pegs to the dollar. By acting promptly at the start of the year, the Fed effectively threw its arms around Asia in the ways previous generations of US officials covered the region in a security umbrella.
Even for China, the exchange rate that matters is the yuan’s value against the dollar. Beijing’s efforts to make the yuan a major world currency have come up short; it accounts for a miniscule portion of global foreign exchange transactions. When it comes to monetary power, China is a minnow.
The Fed’s assertiveness during the pandemic has taken a number of forms. First, the central bank cut its benchmark interest rate to near zero and resumed massive bond buying. Officials then approved dollar-swap lines to nine countries, including South Korea, Singapore, Australia and New Zealand. That allowed those nations to meet the needs of companies and financial institutions rushing for dollars as the global payments system underwent severe strain in March. The Fed established swap lines with the Bank of Japan, European Central Bank and a few others during the global financial crisis a decade earlier. Note these are US allies and partners.
Its next step was to open temporary repurchase agreements that allow monetary authorities to exchange US Treasuries for dollars, which can then be made available to firms in their jurisdictions. Membership of this club was a bit more vague, though it was especially intended for those without a formal swap agreement. You need an account at the New York Fed to apply.
Though a big plus for American influence, the steps also made sense, given the dollar is the linchpin of the world financial system. “It’s not in the US interest to say, ‘Use our currency, borrow in our currency, but if you run out, well, that’s just bad luck,’” said Paul Tucker, a former deputy governor of the Bank of England, in a telephone interview. “That would be an absolute gift to China.”
The Fed isn’t immune from politics. Fed governors, including the chair, are nominated by the president — who tends to favour low borrowing costs for Americans — and confirmed by the Senate. Trump flirted with the idea of trying to fire Chair Jerome Powell in 2018 because he wasn’t moving fast enough to cut rates. Biden hasn't dwelled on the Fed. He's likely to more closely reflect long-term consensus that presidents shouldn't browbeat it.
And whatever the merits of the Fed’s largesse are to the rest of the world, they have flown largely under the radar. Few, if any, senators are asking which countries have or haven’t benefited — it’s probably better that way.
Could the Fed’s backstop pry Asian countries from the allure of China, the region’s biggest economy? No. Nor will many leaders flat-out knock back foreign direct investment from Chinese firms. But the power of the greenback will keep the hedging game in Asia going a good while longer.
