Growth at Home, Uncertainty Abroad

Last month’s Federal Reserve announcement and global debt troubles prompt an interesting discussion on national institutions and their responsibilities.

In December, the Federal Open Market Committee (FOMC) announced its plans to increase short term interest rates over the coming weeks. This is the first step towards normalization of the money supply in over seven years, and a move that economists and investors have been anticipating for months. Employment and spending are strong at home, and our economy is well prepared for the rate hike.

But it’s easy to forget that domestic policy always has spillovers. Monetary shifts directly influence currency exchange rates and demand for exports, sometimes inflicting large shocks on smaller or trade-dependent economies. Often, the most vulnerable are emerging market economies (EME’s)—those nations with growing incomes that still lack the financial and political infrastructure that would deem them “developed.” EME’s now account for over half of the global GDP. More importantly, as EME incomes have risen, their debt levels have skyrocketed. The International Monetary Fund (IMF) estimates that in the last decade, corporate debt in countries like Brazil, India, China, and other smaller emerging markets has quadrupled. Firms in these countries have accumulated over $7 trillion in debt since 2008, and for some of those (Brazil, Turkey), numbers like that could indicate crisis.

In a better year, the debt held by emerging economies might be manageable—even promising. Such a large amount of corporate investment speaks to growing demand for commodities and consumer goods, which are generally harbingers of economic growth. Further, much of the EME accumulation of debt can be attributed to low interest rates in countries like the United States. As the return on investments falls in developed nations, investors take their money elsewhere. And if a foreigner is willing to invest in a firm from a less-developed country, he or she must have some kind of confidence in its future. In other words, the near-zero rates following the financial crisis of 2008 pushed the rich to invest in countries that badly needed infrastructure and capital. This is the kind of thing free capital markets accomplish best. Debt could have been, for many nations, the road to prosperity.

Alas, 2015 was not such a great year for global markets. China’s financial downturn in August triggered a global “bloodletting” (not to mention last week’s), Turkey and its neighbors rocked under the weight of over a million refugees, and Brazil’s president found herself buried in scandal and budget deficits in December. Commodity prices have steadily dropped and growth in EME’s has slowed. Now, the US Fed Board has announced a hike in rates. Emerging markets already strained by problems at home must now watch their capital move out. They are vulnerable, to say the least, in the face of shifting exchange rates and falling demand.

“When domestic policy clashes with the health of growing foreign economies, what should we do?”

What, then, is Chair Janet Yellen’s responsibility in the face of huge foreign debt? In this case, changing rates might mean turmoil in already unstable economies, which—let us not forget—are made of individuals and families. The too-simple answer is that the Fed Board is responsible for the American economy. But to ignore the immense impact Fed decisions have on families and workers across the world would be irrational at best.

In a briefing last April, William C. Dudley, president of the New York Federal Reserve Bank summed up the Fed Board’s position on the issue: “We seek to be good global stewards…. The largest problems that countries create for others often emanate from getting policy wrong domestically. Economic recession or financial instability at home is often quickly exported abroad. Equally important, growth and stability abroad makes all our jobs at home easier.” In other words, the Fed’s interest in global stability is ultimately self-interest. Still, the dollar’s role in the global economy obligates the FOMC to pay attention to international conditions.

Remaining “attentive,” as Dudley put it, entails two things: freeing information and setting a standard of financial responsibility. Regular press conferences and data publication have proven critical to stabilizing volatile EME’s throughout monetary shifts. Information about changing rates prepares foreign firms to make financial decisions. Economists at the IMF and other global institutions have pushed this concern to the FOMC repeatedly. This time around, the Fed’s regular announcements have been praised. But even if the Fed achieves perfect transparency, the spillover effects of rate changes will persist.

So is communication all we can expect from the Fed in regards to recognizing the global impact of its decisions? Perhaps. But if that leaves you unsatisfied—which I think it should—then we have an opportunity to reconsider the goals of our national institutions. When domestic policy clashes with the health of growing foreign economies, do we step back and watch events unfold? Or do we assume the responsibility that comes with economic strength, and innovate to uphold the vulnerable? Those at risk are just beginning to reap the benefits of participating in the global free economy. Let us not undermine that progress.

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