Let me talk just about the emerging markets, which I think is an important issue.

Let me just first say that we have a lot of economists who spend all of their time looking at international aspects of monetary policy. And we spend a lot of time looking at emerging markets. I spend a lot of time talking to my colleagues in emerging markets, so we're watching that very carefully.

The United States is part of a globally integrated economic and financial system. And problems in emerging markets or in any country, for that matter, can affect the United States, as well. And so, again, we are watching those developments very carefully.

It is true that changes in longer-term interest rates in the United States, but also in other advanced economies, does have some effect on emerging markets, particularly those who are trying to peg their exchange rate, and can lead to some capital inflows or outflows.

But there are also other factors that affect inflows and outflows. Those include changes in risk preference by investors, changes in growth expectations, different perceptions of institutional strength within emerging markets across different countries, so there are a lot of factors that are there playing a role. And that's one reason why different emerging markets have had different experiences. They have different institutional structures and different policies.

But just to come to the bottom line here, we think it's very important that emerging markets grow and are prosperous. We pay close attention to what's happening in those -- in those countries. It affects the United States.

The main point, I guess, I would end with, though, is that what -- what we're trying to do with our monetary policy here -- as I think my colleagues in the emerging markets recognize -- is trying to create a stronger U.S. economy. And a stronger U.S. economy is one of the most important things that could happen to help the economies of emerging markets.

And, again, I think my colleagues in many of the emerging markets appreciate that, notwithstanding some of the effects that they may have felt, that efforts to strengthen the U.S. economy and other advanced economies in Europe and elsewhere ultimately redounds to the benefit of the global economy, including emerging markets, as well.

In particular, some critics have argued that the Fed's asset purchases, and accommodative monetary policy more generally, encourage capital flows to emerging market economies. These capital flows are said to cause undesirable currency appreciation, too much liquidity leading to asset bubbles or inflation, or economic disruptions as capital inflows quickly give way to outflows.

...

[T]he perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation. In other words, the perceived advantages of undervaluation and the problem of unwanted capital inflows must be understood as a package--you can't have one without the other.

Of course, an alternative strategy--one consistent with classical principles of international adjustment--is to refrain from intervening in foreign exchange markets, thereby allowing the currency to rise and helping insulate the financial system from external pressures. Under a flexible exchange-rate regime, a fully independent monetary policy, together with fiscal policy as needed, would be available to help counteract any adverse effects of currency appreciation on growth. The resultant rebalancing from external to domestic demand would not only preserve near-term growth in the emerging market economies while supporting recovery in the advanced economies, it would redound to everyone's benefit in the long run by putting the global economy on a more stable and sustainable path.

Central banks typically work individually to achieve objectives for their domestic economies. In the case of the Federal Reserve, monetary policy is conducted to achieve our statutory objectives of maximum employment and price stability. And, of course, fostering a stable financial system is key to attaining these goals. But the experience of the past few years has illustrated--first with the global financial crisis and more recently with the strains in Europe--that cooperation and coordination among central banks around the world may be necessary at critical junctures to achieve these domestic objectives.

Indeed, the global financial crisis has underscored the importance of the financial stability objective of central banks. Given the global nature of financial markets and large financial institutions, coordination and cooperation among central banks and bank supervisors and regulators more generally is crucial in achieving this goal.

In this age of global financial integration, the Federal Reserve and other central banks often must cooperate to achieve their individual mandates. This need for coordination has been especially true during the recent crisis, when the actions of central banks working together proved very helpful in easing financial strains and boosting confidence. Indeed, closer ties and more-open lines of communication across central banks are some positive outcomes of these difficult times. This spirit of cooperation should continue as our respective central banks work to pursue monetary policies appropriate for our own economies while supporting stable financial systems around the world.

I draw several lessons from our collective experience in dealing with the crisis. (My list is by no means exhaustive.) The first lesson is that, in a world in which the consequences of financial crises can be devastating, fostering financial stability is a critical part of overall macroeconomic management...

Second, the past two years have demonstrated the value of policy flexibility and openness to new approaches. During the crisis, central banks were creative and innovative, developing programs that played a significant role in easing financial stress and supporting economic activity. As the global financial system and national economies become increasingly complex and interdependent, novel policy challenges will continue to require innovative policy responses...{Emphasis added.}

Third, as was the focus of my remarks two years ago, in addressing financial crises, international cooperation can be very helpful; indeed, given the global integration of financial markets, such cooperation is essential. Central bankers worked closely together throughout the crisis and continue to do so. Our frequent contact, whether in bilateral discussions or in international meetings, permits us to share our thinking, compare analyses, and stay informed of developments around the world. It also enables us to move quickly when shared problems call for swift joint responses, such as the coordinated rate cuts and the creation of liquidity swap lines during the crisis.

Pianalto said after her speech that while the Fed is mindful of world economic developments, it doesn’t coordinate policy with other central banks and acts according to domestic mandates.

As reported by the Wall Street Journal.

Because the world's policymakers understood the potentially devastating effect of the financial crisis for the global economy, they and we worked urgently to stabilize the situation. In October 2008, in an unprecedented display of coordination, six central banks--the Federal Reserve, European Central Bank, Bank of England, Swiss National Bank, Bank of Canada, and the central bank of Sweden--acted together to cut short-term interest rates. A few days later, after watershed meetings in Washington of finance ministers and central bank governors, many countries, including the United States, announced comprehensive plans to stabilize their banking systems. And at the Federal Reserve, because we were well aware that turmoil in dollar funding markets overseas hurts our own financial markets, we also established temporary liquidity swap lines that enabled 14 central banks around the world to calm their markets by lending dollars in their jurisdictions.

I think it is underappreciated how important harmonization is to ensure success of the global regulatory reform effort. Without harmonized standards, financial intermediation would inevitably move toward geographies and activities where the standards are more lax.  This, in turn, would provoke complaints from those who cannot make such adjustments as easily. The political process, in turn, would be sensitive to such complaints, creating pressure for liberalization, which would cause the tougher standards to unravel over time...

...There is understandable and genuine concern that the impact of moving to global standards will fall disproportionately on some types of firms. In my view, the way to mitigate these issues is to have a long phase-in period in the transition to the new standards rather than to soften or alter the standards to shelter those firms that happen—perhaps by historical accident—to be starting in a less advantageous position. The focus should be more on the side of all ending up in a similar place, rather than on the relative degree of difficulty in getting there.

The process is also fragile because some countries seem intent on strengthening their own set of standards before the international process has had a chance to reach consensus. Although it is understandable that countries would want to move quickly to strengthen their regulatory regimes, such actions should not be undertaken in a way that is immutable and unresponsive to the emerging international consensus.¹

The financial crisis has underscored the importance of the original motivation for creating what is now the FSB. The connections among financial market sectors, and between macroeconomic policy and financial markets, mean that efforts to ensure international financial stability must incorporate a breadth of perspectives and include communication among the various international groups in which regulatory cooperation takes place.

[T]he independence of the European Central Bank must be preserved and the things that other central banks are now doing must be retracted. I view with great skepticism the powers of the Fed, for example, and also how, within Europe, the Bank of England has carved out its own small line. The European Central Bank has also bowed somewhat to international pressure with the purchase of covered bonds. We must return together to an independent central-bank policy and to a policy of reason, otherwise we will be in exactly the same situation in 10 years’ time.

As reported (and translated) by Wall Street Journal.

Unfortunately, the intensification of the financial turbulence last fall led to further deterioration in the economic outlook.  The Committee responded by cutting the target for the federal funds rate an additional 100 basis points last October, with half of that reduction coming as part of an unprecedented coordinated interest rate cut by six major central banks on October 8. 

...

Finally, a clear lesson of the recent period is that the world is too interconnected for nations to go it alone in their economic, financial, and regulatory policies.   International cooperation is thus essential if we are to address the crisis successfully and provide the basis for a healthy, sustained recovery.

The merits of coordinated monetary policies have been discussed by policymakers and academics for decades, but in practice, such coordination has been quite rare. However, on October 8, the Federal Reserve announced a reduction in its policy interest rate jointly with five other major central banks--the Bank of Canada, the Bank of England, the ECB, Sveriges Riksbank, and the Swiss National Bank (SNB)--with the Bank of Japan expressing support. Last month’s joint action was motivated by the abatement of inflationary pressures and increased indications of economic slowing in our respective economies. In addition, the coordinated rate cut was intended to send a strong signal to the public and to markets of our resolve to act together to address global economic challenges.

[L]ast week, in an unprecedented joint action with five other major central banks and in response to the adverse implications of the deepening crisis for the economic outlook, the Federal Reserve again eased the stance of monetary policy.

Recent financial developments and economic data make it clear that the outlook for the U.S. economy has weakened noticeably, and inflationary pressures have substantially abated. Coordinated action symbolizes the determination of central banks to act together to address what is now a global crisis. And it diminishes the potential exchange rate repercussions of any single country’s solo action.

As we adapt the U.S. framework, we have to work to bring about a consensus among the major economies on a complementary global framework. Given the level of financial integration globally, we cannot achieve a reasonable balance at home between efficiency and stability, without a complementary framework of supervision and regulation across the other major financial centers.

“The Bank of England has been very cautious and careful and it has been much closer to the views of the European Central Bank,” Lawson, 76, who was finance minister from 1983 to 1989 under former Prime Minister Margaret Thatcher, said in a telephone interview. “It has not gone conspicuously the way of the Fed, where I suspect that Mr. Bernanke's now regretting it.”

From a Bloomberg telephone interview.