Powell becomes global central banker as risks increase Bloomberg

(Bloomberg) – The Federal Reserve chairman is starting to look a bit like the world's central banker.

In Congress this week, he repeatedly cited the slowdown in global economic expansion by advocating for easier monetary policy in the United States.

"There is something special about growth in the world, especially in the manufacturing, investment and trade sectors," he told the House's Financial Services Committee Wednesday, promising to reduce effective at the end of the month.

Powell is not just being selfless. As he himself said, the international slowdown and heightened trade tensions are weighing on the national outlook.

And since other major central banks lack monetary ammunition, it can be said that the Fed has the burden of supporting the global economy to prevent it from weighing on the United States.

"The tools available in the global community of central banks are limited, allowing the Fed to reduce and sustain growth and financial conditions around the world," wrote economist Michelle Meyer (NYSE 🙂 and his colleagues in a note of 10 July.

In a sense, Powell is simply trying to repair the damage caused by President Donald Trump's trade policy to the global economy. Trump's tariffs – realized and threatened – have prompted multinational companies to postpone their investment plans, thus slowing global growth.

This is not the first time the Fed has changed its position in the face of changes outside the United States. In 2016, it canceled plans to increase rates as a sharp decline in the Chinese currency had upset the international financial markets. And in 1998, he reduced his rates three times in a fast succession of shots while the default of payment of the debt of Russia shook the world economy.

Dominant role

Indeed, the Fed has long played a dominant role in the World Central Bank, as recently pointed out by the Vice President. The divergent performances of the main countries are now different.

"What's a little unusual this time is that the US is much closer to what it wants in terms of employment and inflation than other major economies," Clarida said in an interview. granted to Bloomberg Television on June 21st.

The result: the Fed, with interest rates close to 2.5%, has much more leeway to promote growth than the Bank of Japan or the European Central Bank; both have negative rates.

In his interview, Clarida pointed to another element that has changed in recent years, namely "a much more globalized capital market".

This means that the United States is more affected by developments abroad than would be expected from a mere accumulation of their exports and imports. This exposure is a result of the ups and downs of global financial markets, as investors spend billions of dollars worldwide – and the repercussions these movements can have on the national economy.

"The Fed is increasingly thinking outside the US on global financial conditions," said Jim Caron, fixed income portfolio manager at Morgan Stanley (NYSE 🙂 Investment Management, which is forecasting a Fed rate cut of 50 basis points by the end of July.

JPMorgan Chase & Co (NYSE :). According to US chief economist Michael Feroli, the glut of savings abroad put downward pressure on US interest rates. According to his calculations in a note on 9 July, international conditions depressed the neutral rate – which neither stimulates nor limits economic growth – by 1.5 percentage points.

The Fed's general attention appeared in the minutes of its last meeting on June 18-19. Policymakers "felt that the risks and uncertainties surrounding their prospects, particularly those related to the global economic outlook, have intensified in recent weeks," according to the report released Wednesday.

The president of the Federal Reserve Bank of St. Louis said at a conference this week that he was paying close attention to what was happening abroad.

"The global situation in general is likely to have an impact on my decision making," said Bullard, who spoke out against a reduction in interest rates at the Fed meeting in June. "Europe in particular is certainly one of the facets of the global scene and the European data has been disappointing."

ECB policymakers were united in June in their drive to further stimulate the eurozone economy, while voicing differing views on how to calibrate their tools, according to a report from the meeting. published Thursday.

However, the International Monetary Fund questions the aid the ECB can provide and said Thursday that governments should be ready to intervene in the event of a severe recession.

Powell also cited China and its efforts to debase its economy as a potential source of weakness. While China has put in place various support measures, Prime Minister Li Keqiang said at a conference on July 2 that the country would avoid a political stimulus package similar to that put in place to fight the crisis. global financial crisis more than ten years ago.

In the final badysis, of course, the Fed is responsible for managing the US economy, not the world economy, and achieving its twin goals of maximum employment and stable prices. However, Powell is still expected to play a greater role in supporting international expansion and, hence, the United States.

"People are very concerned about global growth and we will feel it over time," Powell told the Senate Banking Committee. "That's the main thing that concerns me."