The U.S. Economy Is Great and the Fed Doesn't Care
(Bloomberg Opinion) -- For all the anxiety about America's retreat from the world, a vital U.S. institution is becoming more global than ever. While the Federal Reserve's impulse to juice the economy is laudable, it's worth asking whether this mission creep is sustainable. Or even desirable, over a long horizon.
The Fed, whose policymakers meet next week to set interest rates, lacks a pressing domestic case to clip borrowing costs: The jobless rate was close to a five-decade low at 3.7% in June, consumer spending is buoyant and the overall expansion just became the longest on record. Yet the central bank is almost certainly going to deliver a rate cut – as recently as last week, there was even chatter of two.
The most compelling reason Fed officials have put forward is concern about sluggish growth abroad, trade difficulties and references to business confidence – a squishy thing in the best of times. While anemic inflation gives them scope to move now, that’s nothing new: The pace of price increases has been below the Fed's 2% target for much of time since it was formally adopted in 2012.
By persistently citing the global economy, the Fed is close to adding a de facto additional mandate to the ones given by Congress: maximum employment and price stability. Yet there's been very little public consideration of the long-term consequences this shift implies. What if world growth accelerates and the U.S. languishes? Does the Fed raise rates for fear that overheating abroad drives speculative investment at home? That may look unlikely now, but it’s hard to put the genie back in the bottle.
For now, the dollar’s might makes the Fed a global economic policeman. The buck is the dominant reserve currency; most trade is invoiced in greenbacks; and the dollar features in the bulk of foreign-exchange transactions. The currency’s totemic role could even mean the Fed’s efforts to boost growth worldwide is achievable. But America's share of global output is receding, as Pierre-Olivier Gourinchas of the Haas School of Business at the University of California, Berkeley noted in a paper presented in Singapore in May. That could mean this stature will diminish.
To be sure, the Fed has weighed international factors and adjusted course in the past. Typically, it has been a response to specific jolts, such as Russia’s default in 1998 or China's botched devaluation of the yuan in 2015. What we have now is the Fed responding to a more generalized sense of malaise, a view that things could be better in China and Europe, but nothing close to earlier events. Even Judy Shelton, a Trump pick for the Fed, said global conditions would have led her to lower rates at June’s meeting had she been on the board, according to the Washington Post. So much for America First!
A Fed more globally in tune with other large economies is generally a good thing. What happens in China and Europe doesn't stay in China and Europe. And in the short term, such an approach may be better for global economic stability: As long as the dollar is dominant, demand for assets backed in the currency will be steady.
But this position isn’t particularly enviable for the Fed, which already has the president breathing down its neck. The last thing the institution needs is another set of expectations to manage from overseas.
The global economy is transitioning, albeit in fits and starts, to a multi-currency world where the dollar recedes as the euro and yuan advance. The use of the yuan for trade invoicing and settlement as well as cross-border transactions has surged over the past decade, Gourinchas notes. While that’s likely to ease pressure on the Fed over time, the shift will require greater coordination among global monetary authorities. The only thing perhaps more burdensome than shouldering the weight of the world may be figuring out how to share that responsibility with China and Europe.
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Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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