SAO PAULO (Reuters) - The U.S. Federal Reserve should communicate clearly how it will phase out economic stimulus over the coming months to minimize market instability and prevent problems for emerging economies, Brazil’s Finance Minister Guido Mantega said in an interview on Thursday.
The stimulus reduction should also be carried out “very gradually,” Mantega said, noting that the nomination of Janet Yellen to replace Fed Chairman Ben Bernanke appears to be a step in that direction.
Mantega, who skipped this week’s International Monetary Fund and G20 meetings in Washington to focus on domestic issues, said he believes that higher interest rates in Brazil will not be a drag on economic growth. With over $370 billion in international reserves, Brazil is also very well prepared to weather any market instability, Mantega said.
He added that leading emerging economies should have time to set up a joint reserve fund next year before the prospect of higher interest rates in the United States rekindles volatility.
“More clarity and more precision as the stimulus is reduced. This is what we’ve been recommending,” Mantega said in the interview in his Sao Paulo office.
“If they announce: ‘we are going to cut it by $10 billion a month; instead of $85 billion it will be $75 billion,’ such a decision would clearly have no effect” on markets, he said.
Signs that the Fed could start tapering its $85-billion-a-month asset purchases in September sent shockwaves through world financial markets earlier this year, causing steep losses in emerging market currencies such as the Brazilian real.
Yellen, who next year will become the first woman ever to lead the U.S. central bank, is a strong advocate of the Fed’s aggressive actions to support economic growth through low interest rates and asset purchases.
She and fellow policymakers may need to keep the stimulus at full gear for an even longer period as the current political deadlock in Washington hurts economic growth, Mantega said.
The United States looks poised to avert a default, Mantega added, which would likely leave the next round of heightened market volatility for when a Yellen-led Fed starts raising interest rates in a few years.
“I believe Janet Yellen will continue Ben Bernanke’s policies,” Mantega said. “There is an excess of monetary stimulus and at some point this will need to be reduced. The right way to do it is in a very gradual way.”
If Mantega’s prediction pans out, leading emerging economies should have time to create a joint reserve fund to streamline intervention by their central banks in currency markets.
The reserve fund of the BRICS group - including Brazil, Russia, India, China and South Africa - should be created by March with $100 billion in reserves, Mantega said.
He noted that the fund will need to be ratified by local parliaments then.
Mantega, Latin America’s longest serving finance minister, has been a fierce critic of ultra-loose monetary policies in developed economies. He coined the term “currency wars” in 2010 to describe what he saw as an attempt by countries like the United States to devalue their currencies through very low interest rates.
Brazil reacted with several capital controls, but began unwinding some of them this year as market concerns over the U.S. stimulus tapering sent the real to a near five-year low in August. Now at 2.2 per dollar and kept in a tight trading range by daily central bank interventions, Brazil’s exchange rate is helping local industries, Mantega said.
He stressed, however, that the government does not seek to keep the currency at any particular level.
“What I can say is that the exchange rate, at this level, is supporting exports, because I can see an improvement in exports of manufactured goods,” he said.
Mantega also said there is no “political taboo” preventing the central bank from raising interest rates back to double-digit levels if needed to fight inflation.
On Wednesday, Brazil’s central bank gave no sign it would stop raising its base policy rate in coming months after lifting it for a fifth straight time to 9.50 percent, the highest among the world’s largest economies.
The increase should have little impact on economic growth as real interest rates remain historically low, Mantega said.
One measure of real interest rates is the base lending rate adjusted for inflation. In Brazil, it is currently around 3-4 percent.
“What is important is that we are not returning to what we had in the past. Brazil used to have nominal interest rates as high as 40 percent,” Mantega said.
“It doesn’t seem necessary for us to have 40-percent interest rates again, or 8-percent real interest rates.”
Additional reporting by Cesar Bianconi; Editing by Richard Chang and Andrew Hay