{"id":31318,"date":"2022-09-21T01:31:00","date_gmt":"2022-09-21T01:31:00","guid":{"rendered":"https:\/\/www.lifeandnews.com\/articles\/?p=31318"},"modified":"2022-10-02T08:01:15","modified_gmt":"2022-10-02T08:01:15","slug":"fed-keeps-focus-on-us-economy-as-the-world-tilts-toward-a-recession-that-it-may-be-contributing-to","status":"publish","type":"post","link":"https:\/\/www.lifeandnews.com\/articles\/fed-keeps-focus-on-us-economy-as-the-world-tilts-toward-a-recession-that-it-may-be-contributing-to\/","title":{"rendered":"Fed keeps focus on US economy as the world tilts toward a recession that it may be contributing\u00a0to"},"content":{"rendered":"\n

D. Brian Blank<\/a>, Mississippi State University<\/a><\/em><\/p>\n\n\n\n

The U.S. Federal Reserve holds inordinate sway over the world\u2019s economies \u2013 yet it acts, in some ways, like they don\u2019t really matter.<\/p>\n\n\n\n

Its power is primarily because of the dominance of the U.S. dollar<\/a>, which soared in recent months as the Fed\u2019s aggressive interest rate hikes<\/a> made the greenback more attractive to investors. But this has a downside for other countries because it is fueling inflation, raising the cost of borrowing and increasing the risk of a global recession<\/a>.<\/p>\n\n\n\n

If you only paid attention to the words of Fed Chair Jerome Powell<\/a>, however, you probably would have no idea this is happening. He hasn\u2019t said a peep in his public speeches about the significant risks to the global economy as central banks jack up interest rates to tame inflation \u2013 including the Fed\u2019s 0.75 percentage point increase on Sept. 21, 2022<\/a>.<\/p>\n\n\n\n

This may seem a bit odd that the Fed would appear to be so blas\u00e9 about the global economy that it arguably leads. Yet as a finance scholar<\/a>, I believe it makes perfect sense \u2013 though there are risks.<\/p>\n\n\n\n

The Fed\u2019s domestic focus<\/h2>\n\n\n\n

The Federal Reserve is mandated to focus on the U.S. economy<\/a>, and it takes this job very seriously.<\/p>\n\n\n\n

While central banks are aware of all global economic data, they focus on their own economies, helping them do what is best for their own nations. In the U.S., that means the Fed is focused on improving the American economy through stable prices and full employment<\/a>.<\/p>\n\n\n\n

As a result, when the U.S. economy is slowing too quickly and people are losing jobs, such as early in the pandemic<\/a>, the Fed lowers interest rates<\/a> \u2013 no matter the impact on other countries. Similarly, when the economy is growing but consumer prices are rising too fast, the central bank raises interest rates.<\/p>\n\n\n\n

\"Hands
The U.S. dollar is the world\u2019s main reserve currency. AP Photo\/Gregorio Borgia<\/a><\/figcaption><\/figure>\n\n\n\n

And its global impact<\/h2>\n\n\n\n

Yet it\u2019s unavoidable that the Fed\u2019s policies will influence economies, companies and citizens in virtually every country in the world.<\/p>\n\n\n\n

While all central banks influence the rest of the world, the Fed has a much larger impact because of the size of the U.S. economy \u2013 it remains by far the largest in absolute terms<\/a> \u2013 and the prominence of the U.S. dollar in international markets and trade.<\/p>\n\n\n\n

Approximately half of the world\u2019s international debt is denominated<\/a> in dollars<\/a>, which means countries need to pay interest and principle on what they borrow in greenbacks. The dollar has soared almost 15% this year relative to a basket of foreign currencies<\/a>, largely as a result of the Fed interest rate hikes that began in March. That means it\u2019s, on average, 15% more expensive to finance those dollar-denominated debts \u2013 and for some countries, it could be a lot more.<\/p>\n\n\n\n

Moreover, about 60% of all global foreign exchange reserves<\/a> \u2013 that\u2019s the money central banks hold to protect the value of their own currencies \u2013 are in dollars. And since most major commodities<\/a> like<\/a> oil<\/a> and gold<\/a> are priced in dollars, a stronger dollar makes everything cost a lot more for businesses and consumers in every country.<\/p>\n\n\n\n

Finally, when U.S. interest rates are high relative to those in other countries, more foreign investment flocks to the U.S. to get more bang for their buck. Since there\u2019s only so much money to go around, this drains investment<\/a> from other economies<\/a>, especially emerging markets. And it means they have to raise interest rates<\/a> to keep foreign direct investment flowing into their countries, which can hurt their local economies.<\/p>\n\n\n\n

Risks in a global world<\/h2>\n\n\n\n

Unfortunately, focusing solely on the domestic economy has its own risks.<\/p>\n\n\n\n

It may sound cliche, but we do live in a global, interconnected world \u2013 something demonstrated powerfully by the COVID-19 pandemic and the supply chain issues that repeatedly rippled across the world<\/a>. American businesses depend on other countries for supplies, workers and consumers.
That means even if the Fed manages a proverbial soft landing and is able to reduce inflation without causing a recession, a global downturn may still ultimately reach American shores. This could threaten much of the Fed\u2019s success if the global slowdown results in international instability or food insecurity<\/a>.<\/p>\n\n\n\n

So while I believe the Fed is correct to keep its focus on the U.S. economy and lift rates as much as it deems necessary, I\u2019ll be looking closely at the central bank\u2019s economic projections. If the data shows the U.S. economy\u2019s inflation problems diminishing, the Fed may be able to begin to think a bit less about what\u2019s happening in its own backyard and more about the impact of its policies on the rest of the world.<\/p>\n\n\n\n

D. Brian Blank<\/a>, Assistant Professor of Finance, Mississippi State University<\/a><\/em><\/p>\n\n\n\n

This article is republished from The Conversation<\/a> under a Creative Commons license. Read the original article<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

D. Brian Blank, Mississippi State University The U.S. Federal Reserve holds inordinate sway over the world\u2019s economies \u2013 yet it acts, in some ways, like they don\u2019t really matter. Its power is primarily because of the dominance of the U.S. dollar, which soared in recent months as the Fed\u2019s aggressive interest rate hikes made the […]<\/p>\n","protected":false},"author":44,"featured_media":31319,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[5,277],"tags":[12619,11947,4264,446,729,3371,350,6449,4151,1795,1580,348],"_links":{"self":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/31318"}],"collection":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/users\/44"}],"replies":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/comments?post=31318"}],"version-history":[{"count":2,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/31318\/revisions"}],"predecessor-version":[{"id":31414,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/posts\/31318\/revisions\/31414"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media\/31319"}],"wp:attachment":[{"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/media?parent=31318"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/categories?post=31318"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.lifeandnews.com\/articles\/wp-json\/wp\/v2\/tags?post=31318"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}