Wednesday’s signal from the U.S. Federal Reserve on impending interest rate increases is expected to have ramifications beyond America’s shores.
The Fed’s Open Market Committee announced it was keeping, for now, the target range for a key interest rate at near zero but cautioned that with inflation well above 2% and a strong labor market, it expected “it will soon be appropriate to raise the target range for the federal funds rate.”
The federal funds rate is the interest rate commercial banks charge each other for overnight loans of their excess reserves.
“The committee is of a mind to raise rates at the March meeting,” Fed Chairman Jerome Powell told reporters Wednesday. “We have our eyes on risks around the world, but the economy should hold up.”
As the dollar serves as the primary international reserve currency, a U.S. interest rate hike would pressure central banks of other countries to also raise their rates for those who want to borrow money.
“The rest of the world has a lot of dollar debt, and even if their debt is in local currencies, their central banks will often have to raise interest rates to offset the U.S. rate increases to try to maintain some currency stability,” said Gerard DiPippo, senior fellow with the economics program at the Center for Strategic and International Studies.
“Raising interest rates is aimed at stifling consumer demand to address all of this money that’s sloshing around in our economy, and that’s going to affect consumers here, as well as producers of goods and other countries that rely on the U.S. market,” said Sarah Anderson, global economy project director at the Institute for Policy Studies.
Inflation ‘transmitted through trade’
Inflation in the United States is at a 40-year high amid surging consumer demand for goods, a strengthening domestic job market and pandemic-caused supply chain disruptions, including for critical semiconductors.
“The price of U.S. exports increased by more than the price of U.S. imports last year, so in a sense, the U.S. is exporting inflation because the cost of producing things in the U.S. has increased faster than the imports going into it from overseas. So, the inflation can be transmitted through trade,” DiPippo told VOA.
Some economists and policy analysts see the administration of U.S. President Joe Biden confusing structural and cyclical economic matters as it struggles to tame inflation.
“The cyclical phenomenon — inflation — over the next year or so, really only the Fed has the tools to deal with that,” DiPippo said. “Even if the Biden administration is able to increase subsidies to produce things in the United States or increase competition through regulation, those things take time. And we’re talking about inflation over the next year or two, not over the next five years. So, there’s a mismatch.”
The White House has repeatedly said that it is prioritizing lowering prices to help American households and that the best way to accomplish it is through increased competition.
“Competition results in lower prices for families. Competition results in fair wages for workers. And as you all know, competition encourages companies to innovate,” Biden said on Monday during a meeting of the White House Competition Council.
Prices have been surging in the United States and other countries since last year amid serious shortages of workers and the goods they produce. That has the International Monetary Fund predicting slower growth and faster inflation for the world’s biggest economies.
“People have shifted from spending money on services, like going out to restaurants and theaters, during the pandemic to buying more stuff,” Anderson told VOA. That has put more pressure on manufacturers, especially in countries such as China and Vietnam, which are having difficulty keeping pace with demand because so many workers have been sidelined by the pandemic.
“We can raise interest rates, but I don’t think the problem is going to go away until we end the pandemic,” Anderson added.
China’s “No-COVID policy may cause more lockdowns,” exacerbating the supply chain woes, Powell, the Fed chair, warned on Wednesday. “There’s plenty of risk out there.”