The Federal Reserve’s role in the global economy

The Fed, as the central bank of the United States, is responsible for stabilising the US economy, managing monetary policy and overseeing all economic activities in the country. Its decisions not only affect the US but also have an impact on the global economy.

Stock markets are watching the Federal Reserve’s meeting taking place between today and tomorrow. The rate-setting panel will announce its decision on 20 March. Many investors do not expect any surprises regarding the decision and give a 99% probability that it will leave rates unchanged at 5.25% to 5.5%.

On Thursday 7, Jerome Powell, chairman of the Federal Reserve, indicated that interest rate cuts may not be far off if there is “cooperation” by the inflation, but declined to give a specific timetable for when he expects them to occur, which could be delayed until the summer.

Holding higher rates for a little longer could keep pressure on the economy, protecting it against the risk of inflation picking up again. The latest inflation data indicates that the pace of price increases continues to moderate, although the CPI shocked markets when it was higher than expected in January.

On the other hand, the US is in an election year and Democrats want a rate cut to further boost the economy. At the same time, Donald Trump sees it as interference from the White House and threatens to change the Fed chairman when he regains the presidency if it “helps” his rival.

In any case, investors’ attention remains focused on whether the central bank will guide the expected timing of what would be the first-rate cut since March 2020, when the economy was in free fall because of the pandemic, which led the Fed to slash borrowing costs.

 

The ECB keeps an eye on the Fed

The inflation experienced in recent years has been a widespread problem affecting the world’s major economies, both in the US and Europe, and central banks raised interest rates precisely to control this price increase.

That said, other institutions, such as the European Central Bank, are awaiting the Fed’s decision before making a move. The ECB admitted that it made the mistake of taking too long to raise interest rates when inflation spiked in 2022, while the Fed reacted much earlier. Therefore, the president of the European Central Bank, Christine Lagarde, has all eyes on the Fed to avoid making the same mistake.

Global consequences

The Fed’s decisions directly impact global financial markets, affecting international trade, capital flows, emerging economies and shaping the global economic landscape. This is mainly due to the dominance of the dollar as the most important reserve currency today, because of the legacy of the Bretton Woods monetary system.

The dominance of the dollar in world trade means that its strength or weakness can have a significant impact on commodity prices around the world. This has a direct effect on global value chains, through which companies from different countries coordinate the production and distribution of goods around the world.

A strong dollar can hurt emerging countries that are in a delicate financial situation since the devaluation of their currency against the dollar makes imports more expensive and increases external debt. Moreover, these countries need more local currency to obtain dollars with which to repay debt or to buy energy, food and raw materials from abroad.

Even so, when the dollar is weak, oil prices tend to rise, as it takes more dollars to buy a barrel of oil. This can have consequences for other industries, such as transportation and manufacturing, which are heavily dependent on hydrocarbons.

Similarly, a weaker dollar can mean a decrease in the competitiveness of other economies that use their currencies, such as the European Union, especially the eurozone, and therefore a reduction in their exports.

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  1. Manuel Bullich BuenoManuel Bullich Bueno says:
    Manel

    El BCE sempre l’enganxen amb el peu canviat.

    • Xavier Vinolas EscodaXavier Vinolas Escoda says:
      Xavier

      Cert, algú podria pensar que ja no és casualitat.

      3 weeks ago

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