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Between the lines _____ _____. _____
Open: 'As the US dollar grows stronger, that comes at the expense other currencies around the world. . .
End: . . .What started as an effort to contain US inflation will have suddenly become a dire global slump.'
✓
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The Fed has the world in its hands — and its aggressive
moves are creating global economic chaos that could come back and hurt
the US
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- The Federal Reserve's aggressive rate hikes have the world's central banks scrambling to keep up.
- A strong dollar puts others in a lose-lose: fight inflation and slow growth, or allow prices to continue surging.
- Countries are largely choosing the former, and widespread slowing could worsen the US's own slump
. . . And while the ongoing "reverse currency war" might sound like good news for the US, the nature of the modern global economy means that slowdowns abroad can hurt at home. . .
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✓ US policy has the rest of the world scrambling to keep up
On September 21, Fed Chair Jerome Powell reiterated that the central bank won't stop raising rates until "the job is done." With jumbo-sized rate hikes likely, major economies like the UK, Japan, and China are vulnerable to a prolonged economic downturn. Since their currencies are already weakening against the dollar, those countries either need to hasten their rate hikes and risk recession or allow the dollar to strengthen further and diminish their own currencies' values.
As a result, more than 80 central banks around the world are following the Fed's lead. They are continuing the tightening plans that kicked off earlier this year and moving aggressively to cool their own unique kinds of inflation.
Yet there's little coordination between
policymakers. Instead of officials working in harmony to tame global
inflation, central banks are rushing to prop up their own currencies as
fast as possible. . .
While the US leads the way for now, its dominance can quickly backfire
The
Fed isn't yielding in this game of central-bank chicken. Projections
published on September 21 suggest policymakers will raise interest rates
by another 1.25 percentage points before the end of the year and
continue to hike through 2023. . .
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But Powell seems to be taking a "soft-ish landing" scenario — when rate hikes only lead to a moderate economic slowdown — for granted. If other central banks are forced to hike aggressively to keep pace with the dollar's appreciation, then his hawkish statements could fuel global growth recessions that come back to bite the US.
The US relies on imports to maintain a steady supply of goods like food, crude oil, and car parts — and the price of those goods is directly connected to the performance of other global economies.
Take China as an example. If Beijing's efforts to prop up the yuan against the dollar tip the Chinese economy into a growth recession, manufacturing and industrial activity are likely to fall. That would mean China produces less of the goods it tends to export to the US — such as aluminum, glass, and wood.
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Import prices would likely rise as supplies of those goods fall. American importers would be left with a choice between passing those higher costs onto consumers or seeing their profit levels take a major hit — with either route contributing to a harsher recession.
What started as an effort to contain US inflation will have suddenly become a dire global slump".
Decades-high inflation has triggered a 'reverse currency war' as a soaring dollar leaves central banks scrambling to catch up
- A "reverse currency war" is breaking out amongst global central banks as they race to keep pace with a rapidly appreciating dollar.
- The Federal Reserve's torrid rate hikes — intended to suppress decades-high inflation — have been a major driver of the greenback gains.
- Japan has already moved to strengthen its currency for the first time in 24 years, while the British pound is fresh off record lows against the dollar
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