Raghuram Rajan's Call For Coordinated Global Monetary Policy A Distant Dream

It is true that the crisis in Ukraine and the geopolitical tensions in the Middle East have led to the flow of funds into U.S bonds and the greenback (both perceived as safe haven assets) in recent weeks. But what has really been at play is arguably the most dovish U.S Federal Reserve establishment.

At each press conference and in the minutes of the Federal Open Market Committee (FOMC), Janet Yellen has categorically reiterated the fact that the U.S Fed would continue to remain accommodative until a sustainable recovery in the labour market is not seen.

Note that nobody is talking about the "Evan's rule" now - which linked certain threshold levels that key macro variables (inflation and unemployment rate) must reach and U.S monetary tightening.

What U.S policy makers fail to understand is that the weakness in the jobs market is more to do with structural rather than cyclical problems. One only has to look at a long-term chart of the labour participation rate in the United States and arrive at this conclusion.

This column fears that it may be the case that the QE exit strategy may not be as smooth as the Fed desires and we may witness a 1994-style bond crash with U.S yields rising rapidly by the end of 2014 or early 2015. Thus, we can forget about U.S policy makers keeping emerging economies in mind while we move from the QE taper to the first interest rate hike. They first need to get their own house in order.

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