What US decline? The world still watches the Fed
If America is in decline, that message hasn’t gotten through to the world’s most powerful unelected officials.
Central bank chiefs the world over still mostly look to the Federal Reserve for guidance and precedent. Same goes for the armies of analysts, investors and journalists who follow monetary policy for a living.
I broached this theme on a visit to Asia a few months ago. The July meeting of the Federal Open Market Committee, viewed from Hong Kong, was the be-all and end-all. It was like nothing had changed in almost two decades. The People’s Bank of China barely rated a mention. That was a powerful demonstration of US financial power versus the weight of, say, direct investment and trade flows, where China’s influence has grown significantly.
Since my return from Asia, the past month has offered two examples that suggest a Fed-centric view of the world wasn’t unique to Hong Kong, which pegs its dollar to the greenback, or Asia more generally, where several countries have dollar pegs of some kind. In fact it’s a global phenomenon.
At the Fed’s Jackson Hole retreat in August, South African Reserve Bank governor Lesetja Kganyago discussed the Fed’s dominant role in financial markets and how its policy framework is felt far beyond the borders of the US.
“The Fed has actually communicated so well, so transparently, that it has actually made it easier for us when we have to make our own monetary policy decisions,” Kganyago said, according to the Wall Street Journal. “We base our decisions on what we see the outlook for the US economy is, and I think that the communication from the Fed has been so clear that if the markets decide not to believe what the Fed says, it is at their own peril.”
What makes Kganyago’s comments all the more startling is the popular narrative that China is the rising economic power on the continent of Africa through factories, the development of infrastructure and loans. China has even been likened to a colonial power.
The second example was just as surprising and, as a result, equally telling. It’s from Poland, where it would be easy to imagine the dominant financial influence as coming from either Germany or Russia. Not quite, according to Mateusz Morawiecki, Poland’s deputy prime minister and minister for economic development.
Most important for interest rates is the Fed, Morawiecki told me and my colleagues Peter Coy and Nikolaj Gammeltoft during a visit to our New York office a few weeks ago. Isn’t the ECB, headquartered in Frankfurt, more important?
In terms of regulation, yes. Poland is a member of the European Union, though it doesn’t use the euro. But in monetary policy, the Fed has primacy, in part because the ECB tends to follow the Fed, he said.
This isn’t to say that the direction of Chinese interest rates is insignificant to the world or that a shift at the ECB can be blown off outside the 19 members of the euro area. When Chinese markets gyrated in 2015 and 2016, the impact was felt in capital markets around the world. When that caused the Fed to defer plans to step up interest rates, the calming impact was greater. Poland’s perspective may change if it does decide to adopt the euro, and China may make still further inroads into the economic and commercial calculus of Africa.
For now, South Africa and Poland—coupled with the Fed obsession I saw in Asia during July—do show that notions of American geo-strategic decline don’t always line up with the price of money.
It’s perspective worth remembering as we approach this week’s Federal Open Market Committee meeting and the end of Janet Yellen’s term as Fed chair. As President Donald Trump weighs whether to re-appoint Yellen or tap someone else, he might bear in mind that when it comes to monetary policy, there’s no need to make America great again. Bloomberg View
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