What Yellen Didn’t Say

New Fed Chair stays the course, despite criticism that U.S. policies are harming developing economies.

In her first major speech on monetary policy since taking the helm at the U.S. Federal Reserve in February, Janet Yellen said that she'll be watching the labor market and inflation and keeping an eye out for any other surprises that might derail the U.S. economic recovery as she considers how long to keep interest rates close to zero.

Yellen's focus on unemployment and inflation comes as no surprise, but she also highlighted the need to keep tabs on other economic factors that might not be reflected in those numbers.

"Because the course of the economy is uncertain, monetary policymakers need to carefully watch for signs that it is diverging from the baseline outlook," Yellen said in a speech Wednesday at the Economic Club of New York.

Yellen said that she assumed in her "baseline outlook" that it would take two more years to close the gap between the current unemployment rate of 6.7 percent and the Fed's target of 5.2 to 5.6 percent. But she also said that the real picture of labor market could be even more dire because those numbers might not reflect all the people that can't find enough work or who have given up looking. "The share of the workforce that is working part time but would prefer to work full time remains quite high by historical standards," she said.

But one thing Yellen didn't mention: the effects her actions might have on other countries.

Central bankers are not charged with running the global economy, only their domestic spheres, but a growing number of leaders of smaller economies are arguing that developed countries should pay more attention to the international consequences of their policy decisions.

India's central bank governor, Raghuram Rajan, said that large countries should "become more sensitive to spillovers" of their policies, at a speech last week at the Brookings Institution.

At issue is the Fed's decision to "taper" its stimulus program for the U.S. economy, which has had adverse effects on emerging markets around the world. To spur the sluggish U.S. economy after the financial crisis, the Fed started buying bonds from banks, effectively pushing money into the U.S. financial system to hold down borrowing costs and try to get banks to lend and, in turn, businesses and individuals to spend. But the money didn't all stay inside American borders. Because U.S. interest rates were low and the economy hadn't yet recovered, people looked for investments overseas that would return more money for each dollar they put in.

"This money was chasing returns all over the place, including in countries like Brazil," Alexandre Tombini, Brazil's central bank chief, said Friday at a lunch hosted by Foreign Policy. This made emerging market economies suddenly much more attractive because they were growing and because the riskier investments came with higher returns. "At that time we were, sort of, arguing for the source countries to also take measures to make sure that this liquidity was serving their own jurisdictions not sort of spilling over into the rest of the world." Some countries were wary of the money flowing from the U.S. into their smaller economies because it pushed up the value of their currencies and made it cheaper to borrow money, which can create bubbles and encourage companies, and countries, to take on more debt than they can afford.

In January, the Fed started scaling back its purchases of bonds, which is expected to take until October. When former Fed Chairman Ben Bernanke announced the move last summer, he caused the tide to shift. People saw the U.S. as a better place to invest again because they anticipated that interest rates would soon rise. Investors moving their money out of smaller countries in order to shift it to the U.S. caused problems for smaller economies across the globe, from Turkey to Indonesia. Brazil, for instance, has been struggling with slow growth and high inflation that has pushed the price of staples like tomatoes so high that restaurants are dropping dishes that contain the expensive fruit from their menus. Though some economists argue domestic policies within these countries are at least partly to blame, the shift has prompted criticism of the U.S. Fed.

"When the advanced economies were really at the depth of the crisis, it was the emerging markets that helped stabilize, that helped create some balance to the global outlook," South African central bank Governor Gill Marcus told Bloomberg in February. "The challenge here is if the advanced economies say OK, you are on your own, the scale of the emerging markets is such that it's going to impact on this fragile recovery."

But it's not just the "tapering" that emerging markets have to worry about. Once the Fed has stopped the bond-buying program, it will at some point start raising interest rates. All eyes are on when that might happen because it could spur more people to move their money back to the U.S., further exacerbating the problems of weaker economies.

"Once the Fed starts tightening policy that will perhaps trigger a second temper tantrum like we saw last year," said TD Securities analyst Millan Mulraine, referring to the nickname that observers gave to this market phenomenon. Investors' change of heart about emerging markets after Bernanke's announcement that the Fed would start tapering off the bond-buying program was later dubbed a "taper tantrum."

Analysts expect the first possible interest rate hike to come in mid-2015, but Yellen emphasized that the Fed's plan would have to respond to changing circumstances, including any signs the U.S. economic recovery is faltering.

"A vital aspect of effective monetary policymaking," she said, is to "monitor the economy for signs that events are unfolding in a materially different manner than expected and adjust policy in response in a systematic manner," Yellen said.

That may be the silver lining for emerging markets  -- the decision to raise rates will be dependent on an improving domestic economy and that could be good for everyone.

"The U.S. economy ultimately will be a driver for the rest of the world," said Mulraine.

Andrew Burton/Getty Images


'We'll Probably Get Through This Year'

The U.N. is begging for money to help Syrians who've fled their homes, as tensions over refugees in Jordan and Lebanon heat up. But there's no solution in sight.

In late March, a Syrian refugee dramatically set herself on fire in front of the office of the U.N. Refugee Agency, UNHCR, in the embattled Lebanese city of Tripoli. Only a few days later, Lebanon hit the grim milestone of its millionth Syrian refugee. Soon after, in Jordan, as the U.N. was preparing to open a massive new refugee camp, a riot swept through the country's existing camp, leaving one Syrian dead and dozens of refugees and police officers injured.

These violent events have grabbed headlines, but refugee experts say they are most likely isolated incidents. The real danger signs about the future of the Syrian refugee crisis are more widespread and entrenched: Both Lebanon and Jordan are struggling to deal with huge populations of Syrians, and international funding isn't keeping up with their needs. At the same time, the ongoing devastation of Syria is generating a seemingly endless supply of new people seeking refuge. The crisis, as it is being handled now, is unsustainable -- and unless something drastically changes, it's only going to get worse.

"We'll probably get through this year," says Andrew Harper, the head of UNHCR in Jordan. "But then how are we going to go through 2015? And if we struggle through 2015, how are we going to go in 2016 and beyond?"

Jordan currently hosts about 600,000 refugees, in a country whose pre-crisis population was estimated at barely over six million. About 100,000 of the refugees live in the massive Zaatari camp, which is run by the UNHCR and other humanitarian agencies, with international funding. The other half a million are dispersed among cities, towns, and rural areas. The U.N. also provides some assistance to these "urban refugees," but much of the cost falls on the government, through public services and subsidized goods. These refugees also put strains on local communities, which are facing rising prices, falling wages, and increasingly overcrowded public services.

The most worrying sign about the impact of refugees, in Harper's view, is Jordan's public debt. It recently climbed to $26.5 billion, more than 79 percent of the country's GDP -- up from 67 percent in 2011, when the Syrian crisis began. The number suggests that Jordan cannot continue to essentially subsidize half a million refugees without facing severe economic repercussions.

In Lebanon, the situation is even more desperate. The country's pre-crisis population was only four million, so the presence of one million refugees there is staggering. And since Lebanon has so far not allowed camps to be built, all of those refugees are living in local communities, having a profound impact on the local economy and on social and political tensions. Lebanese officials have repeatedly described the influx as an "existential threat" to their country. Last October, UNHCR's Lebanon representative Ninette Kelley told Foreign Policy that the situation was unsustainable over the long term. (In addition to the economic effects of refugees, Lebanon faces security threats due to spillover from the Syrian war, which could re-ignite the country's long-simmering sectarian tensions.)

In both countries, the international community's attempts to help are persistently underfunded. In 2014, the U.N. asked for $1.2 billion for its operations in Jordan, and $1.7 billion for Lebanon. Little of that money has materialized: UNHCR says it has only 14 percent of the funds it requested for Lebanon, and 16-20 percent for Jordan. "We're already seeing an increasing disinterest from some [donor] states," Harper says. "I'm already having to look at what are the priorities that we have to continue, and what are the areas that we need to start cutting. And we're only in April."

But even as funding diminishes, the size of the problem continues to grow, as more and more people flee Syria. Every day, for months, UNHCR Lebanon has been registering some 2,500 new Syrians who are looking for assistance, says Lynne Miller, the agency's deputy representative for operations. "We see no reason to suppose that it will slow dramatically,"

"The expectation very much is that the number of refugees will continue to rise... as long as the conflict continues in Syria," agrees Lama Fakih, the Syria and Lebanon researcher for Human Rights Watch.


Growing populations of refugees may have been a contributing factor in recent violent incidents.

The riot in Zaatari started on the camp's eastern border, where many of the newest arrivals from Syria have pitched their tents. At about 4 p.m. on April 5, according to both U.N. and Jordanian officials, police caught and detained a number of refugees trying to smuggle themselves out of the camp. Exaggerated rumors about what had happened quickly began to spread, and a crowd gathered around the police station, swelling into the thousands.

At some point, the expression of anger turned into outright confrontation: The police say they used tear gas to try and defuse the protests, but at some point, shots were fired. Some refugees say the shots came from the police, while the police say the gunfire came from the crowd. At the end of the day, three refugees were taken to a nearby hospital with gunshot wounds; one died. Twenty-eight police officers were injured, along with an unknown number of refugees, and more than a dozen tents and caravans were burned.

U.N. officials say that while the violence was both tragic and unacceptable, they believe it was an anomaly -- stemming from a particular set of circumstances, rather than from widespread discontent with life in the camp. In fact, the situation in Zaatari has gotten better over time: When the camp first opened in mid-2012, violent incidents were a regular occurrence, but by the second half of 2013, they had almost ceased. "The last big riot that we had was in July or August of last year, and all the indicators on the security have been improving," Harper says.

That said, the number of new arrivals has crowded the camp, pushing it to its limits -- a recipe for tension.

In part to deal with this crowding, at the end of April, UNHCR and the government of Jordan plan to open a second massive refugee camp on a wind-swept patch of desert near the town of Azraq. This camp has been in the planning stages since March 2013, when the population of Zaatari was close to 120,000, and more than 1,500 Syrians were fleeing into Jordan every day. But in May of that year, Jordan started limiting the number of Syrians who could cross the border. By June, average entries had fallen 75 percent, to fewer than 500 a day. Over successive months, it would fall lower still. (Jordan has consistently denied that it limits entries, though the phenomenon has been documented by watchdog organizations like Amnesty International and Human Rights Watch, as well as by journalists.)

With many refugees denied entry, and others returning to Syria, the population of Zaatari fell to as low as 85,000 at the end of 2013. For months, there was no need to open a new camp, and Azraq, though much of it was built, sat empty. The uninhabited camp came to be seen as an expensive white elephant -- to date, it has cost roughly $63 million. Harper says it was a necessary preparedness measure, in case the number of refugees surged again. But since the government controls the border, refugee entries are unlikely to rise unless Jordan decides they should. In this context, many aid workers saw the ongoing work on Azraq as an attempt by the U.N. to convince the Jordanian government to allow more Syrians in.

Recently, border crossings have indeed increased -- not to 2013 levels, but to 700 or 800 people a day. Azraq was planned to accommodate up to 130,000 refugees, but Harper says it, too, will quickly be filled.

Once that happens, it is unclear what comes next: Most likely, Jordan will tighten its border control policies again -- at least until yet another camp is built.

The cost of Azraq will also be enormous: At its height, running Zaatari cost as much as half a million U.S. dollars a day, and the price of the new camp is expected to be similar. "It's expensive to run these refugee camps," Harper says. "[But] this is literally lifesaving."

With the agency's appeal for international support going mostly unfunded, UNHCR is practically begging for money to run Azraq. "We cannot continue to deliver humanitarian assistance and protection to refugees," Harper said at a recent press conference, "unless money comes forward."

Crowding has also been an issue in Lebanon, which unlike Jordan, has not limited refugee entries. "The Lebanese government has been the last government in the region to maintain an open border," says HRW's Fakih. She adds that because of its long, porous border with Syria, Lebanon likely would not be able to limit entries, even if it tried. "You're not going to have fewer Syrians, you're going to have fewer Syrians here legally," she said.

With funding low and the number of refugees increasing, UNHCR Lebanon has recently had to start "targeting" assistance -- limiting it to only the most vulnerable families. So it was that Mariam al-Khawli, who had been receiving a variety of different kinds of assistance from the agency, found that her food aid was going to be cut. On March 25, it was al-Khawli who set herself on fire outside a UNHCR building in protest, suffering burns over 70 percent of her body.

UNHCR's deputy representative in Beirut, Lynne Miller, says the agency works hard to keep people from falling through the cracks. "We've got in place quite a lot of systems to make sure this doesn't happen, but with over 200,000 families in the country at the moment, there will always be individual families who needed a different response," she explains. And while al-Khawli's self immolation was extreme, the future may hold more demonstrations of frustration. "A continuation of not having the funding we need, and the growing pressures in the country, may well mean that we see more desperation among the refugee population," Miller says.


In Jordan, the U.N. risks not having enough funding to maintain basic services in camps and cities, which could trigger more violent outbursts. The country's rising public debt also threatens an economic meltdown. In the medium term, however, the gravest risk might be that Jordan will tighten its border controls further -- leaving more Syrians trapped and vulnerable to violence at home.

In Lebanon, meanwhile, social tensions around refugees are rising to perilous levels, in tandem with political and sectarian tensions in the border areas. Violence has already broken out there, and failing to come up with solutions for refugee issues increases the risk that violence could spread.

Fakih calls the international response to these matters "grossly inadequate." Short of an end to the conflict in Syria, she says two things are necessary to stave off the most profound problems associated with the refugee crisis. The first would be for the international community to shift from providing emergency humanitarian aid to making a commitment to long-term development aid, in an attempt to improve services "across the board" in host countries. The second would be for Western nations to step up and resettle more refugees themselves.

Both these solutions face hurdles: Dealing with the problem from a development perspective would require host country governments to admit that they may be accommodating refugees for years, even decades to come, something that is generally politically toxic. (Though there have been hopeful signs in Jordan, and Miller says some development aid should soon be coming to Lebanon as well.) And recent history suggests that, with more than four million Syrian refugees distributed across the Middle East, Western nations are unlikely to resettle enough people to make any substantial difference.

In short, there is a finite set of answers to the refugee crisis: settlements or cease-fires in Syria; a massive program of resettlement in the West; long-term, enormous humanitarian funding through the U.N.; or a serious international commitment to development of refugee host countries. All seem almost equally unlikely -- yet some solution, or combination of solutions, must be found, because the end result of the status quo will only be more violence and economic turmoil across the region.