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When the Federal Reserve meets eight times a year to set the interest rate policy, their task, entrusted by Congress, is to determine what is best for the US economy.
Their job is not to establish a policy that is best for China, Brazil or Indonesia. In 2015, things were looking good for the United States. Inflation was below the Fed's 2% threshold, but traditional economic models that central bankers had long been relying on had predicted that it would begin to rise with the rapid drop in the unemployment rate.
Even as oil and other commodity prices began to fall in the middle of the year, Fed models viewed it as positive for the economy as a whole.
While some oil drillers and farmers may have lower incomes, consumers around the world would benefit from cheaper gasoline and grocery bills. Although officials spent a great deal of time monitoring the global economy, the fact remains that the United States did not depend as much on exports as many smaller countries.
The 2008 financial crisis had shown how closely the US and European banking systems were intertwined, but the same could not be said of the ties with Chinese banks.
In other words, during the summer of 2015, many Fed officials certainly felt that the right decision was to start raising interest rates.
In the Treasury Department, which is responsible for the monetary policy of the United States, it seemed that since 2015, the strengthening of the dollar was on the whole benign.
"There was a feeling that the United States was doing well and that the rest of the world was not doing very well," said Nathan Sheets, an under-secretary at the time and now chief economist at PGIM. Fixed Income. "She was motivated by strong American fundamentals."
But by the end of the summer of 2015, financial markets began to react more violently to the feedback loop of currencies and global commodities.
It has begun to appear that some of the old rules of thumb – concerning the influence of a rising dollar or falling oil prices on the economy – may not apply. Perhaps the economic models used by the forecasters had become obsolete and did not fully take into account how the growth of energy production had become more closely linked to the manufacturing sector and the financial markets.
"All of these things were interconnected in different ways and they all resumed their way into the same industries and parts of the economy," said Jay Shambaugh, a member of the White House Council of Economic Advisers. time.
Nevertheless, summarizing this complex story into specific memos for senior officials was not an easy task.
"You have to write short and accurate notes to the White House, and it was hard to say exactly what we thought was going on," he said.
Behind the closed doors of the Fed, officials began to wonder whether this explosion of market volatility actually posed a risk to the economy as a whole. Should they stick to their plans for regular increases in interest rates or slowing?
For two days in October, the debate took place publicly. Stan Fischer, the Fed's vice president, was reluctant to adjust the planned rate hikes and did not want to let financial market fluctuations dictate his policy.
"We do not currently anticipate that the effects of these recent developments on the US economy will prove significant enough to have a significant impact on the path of politics," he said during a speech. in Lima, Peru, on October 11th. 2015.
Lael Brainard, a Federal Reserve governor who had worked on international issues at the Treasury, was a little more worried.
"There is a risk that the intensification of international cross currents will weigh more heavily on US demand directly, or that the anticipation of a sharper divergence in US policy may impose a restraint by tightening additional financial conditions, "she said on 12 October. Washington.
Ms. Brainard was right.
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