The US Federal Reserve chair Jay Powell has been accused, with some justification, of inconsistent and confusing communication over the past few months. But when the Fed’s open market committee met this week, the message that emerged was loud and clear. The central bank’s view of the global economy and its effect on inflationary pressures in the US had taken a notable turn towards the darker side.
Emphasising its plan to be patient before changing monetary policy again — a point made in public by several Fed policymakers in recent weeks — the Fed’s new line chimed with the views of investors in the financial markets. Futures prices had implied that the central bank had been too bullish about the prospect of growth and inflation that would justify more rate rises in the medium term. This week brought the Fed closer in line with those expectations.
More generally, whatever the influence of the rest of the global economy over the Fed, that of the Fed over the rest of the global economy will be largely positive. Although it is emphatically not the job of the Fed to manage the rest of the world, except in times of dire crisis, lower US bond yields and a weaker dollar will be welcome in many emerging markets where governments and companies have borrowed in dollars. At the margin, it may also encourage the European Central Bank and other large monetary authorities to keep policy loose.