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Like it or not, the U.S. Federal Reserve needs to think globally. Americans should heed the call of Manmohan Singh, India's prime minister and a distinguished economist, for an orderly and internationally coordinated reversal of stimulative monetary policy in rich countries. The Fed has only a domestic mandate, as one of its governors pointed out recently, but the world is too globalised for monetary nationalism.
The danger is clear in India, which is currently being buffeted by foreign investors trying to get ready for the Fed's next moves. The United States, which issues the world's reserve currency, may not be as vulnerable. However, if Fed chairman Ben Bernanke and whoever succeeds him next February think only domestically, they're likely to get into trouble.
As yet, the prospect that the Fed may soon slow its pace of bond-buying, or quantitative easing, has caused less distress in the United States than in leading emerging economies such as Brazil, India and Indonesia. In dollar terms, the key stock indexes in those three markets are down 27 per cent, 20 per cent and 19 per cent, respectively, in 2013, while the U.S. S&P 500 Index is up 16 per cent.
But disorderly disruptions in such formerly buoyant countries would hurt the United States. Exports would be hit by a regional recession and U.S. banks and investors would suffer losses. The malaise could pull down oil demand enough to hit the price, harming one of the most promising sectors of the American economy. Besides, Uncle Sam is a big debtor, albeit a powerful one. Washington needs the goodwill of creditors and trading partners.
International interconnectedness helped make the U.S. subprime crisis global, and the recovery will also cross borders. The crisis is already five years in the past, and economists at Société Générale reckon it could take that long again for the Fed to phase out QE, lift interest rates and run off its nearly $4-trillion (U.S.) balance sheet to a pre-crisis size of $1-trillion or so. Without communication and some cooperation with other central banks, it will be hard to avoid a slip-up.
The G20 group of countries, meeting in St. Petersburg, seems a good forum for collaboration – even if the Fed can't quite say so in D.C.