Why the Fed keeps its focus strictly on the U.S. economy even as its actions could push the whole world into recession

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The US Federal Reserve has enormous influence on the world’s economies – yet it acts in some ways as if they don’t really matter.

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Its potency is mainly due to US dollar dominance
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which rose in recent months as the Fed aggressive interest rate hike
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Made the greenback more attractive to investors. But this has a downside for other countries as it is driving up inflation, raising the cost of borrowing and The threat of a global recession is rising,

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If you only paid attention Words from Fed Chair Jerome PowellHowever, you might not be aware that this is happening. He hasn’t said a glimpse into the significant risks to the global economy in his public speeches as the Fed and other central banks raise interest rates to tame inflation-during their meetings in late September include Which ended on Wednesday.

Read more: 4 things to watch when the Fed makes its rate-hike decision

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It may seem a bit strange that the Fed would seem so cynical about the global economy that it arguably goes ahead. yet as a finance scholarI believe this makes perfect sense – although there are risks involved.

Fed’s Domestic Focus

Federal Reserve is Essential to focus on US economyAnd it takes this job very seriously.

While central banks are aware of all global economic data, they tend to focus on their own economies, helping them do what works best for their nations. In the US, this means the Fed is focusing on improving the US economy through Stable prices and full employment,

As a result, when the US economy is slowing down too fast and people are losing their jobs, such as at the start of the pandemicfed lowers interest rates-No matter the effect on other countries. Similarly, when the economy is growing but consumer prices are rising too rapidly, the central bank raises interest rates.

Yet it is inevitable that the Fed’s policies will affect economies, companies, and citizens in nearly every country in the world.

While all central banks influence the rest of the world, the Fed has a huge influence because of the size of the US economy. remains the largest ever in absolute terms—and the prominence of the US dollar in international markets and trade.

Nearly half of the world’s international debt is denominated In Dollar, which means countries are required to pay interest and principle on what they borrow in the greenback. Dollar DXY DXY,
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As a result of raising Fed interest rates that began in March, it has risen about 15% this year relative to a basket of foreign currencies. That means those dollar-denominated loans are on average 15% more expensive to finance—and for some countries, it can be much higher.

apart from this, About 60% of all global forex reserves—This is money that central banks keep to protect the value of their currencies—in dollars. and since most important items to like Oil
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And Sleep
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Priced in dollars, a strong dollar costs businesses and consumers pretty much everything in every country.

Finally, when US interest rates TMUBMUSD10Y,
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There are more than in other countries, more foreign investments come to the US to get more bang for their buck. Since there’s only so much money to go around, it drains Investment from other economiesespecially in emerging markets. and it means they have to raise interest rates To flow foreign direct investment into their countries, which can damage their local economies.

risk in the global world

Unfortunately, focusing only on the domestic economy has its risks.

It may sound preposterous, but we live in a global, interconnected world – something that is powerfully demonstrated by the COVID-19 pandemic and repeated supply-chain issues. waved around the world, American businesses depend on other countries for supplies, workers, and consumers.

This means that even if the Fed manages a proverbial soft landing and is able to reduce inflation without a recession, a global recession could eventually reach US shores. If a global recession does result, it could be a huge threat to the Fed’s success international instability or food insecurity,

So while I believe the Fed is right to keep its focus on the US economy and raise rates at the September 21 meeting, I will take a closer look at central bank economic projections. If the data eases the US economy’s inflation problems, the Fed may begin to think a little less about what is happening in its own backyard and the impact of its policies on the rest of the world.

D. Brian Blanco Assistant Professor of Finance at Mississippi State University

This commentary was originally published by The ConversationFed focuses on US economy as world braces for a recession it could contribute to

more on the feds

US stocks rally ahead of Fed decision, even as Putin raises war footing

The Fed is ready to tell us how much ‘pain’ the economy will suffer. Although it still won’t indicate bearishness.

The Fed is about to give ‘some pain’ in its fight against inflation—how to prepare

Credit: www.marketwatch.com /

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