For years, the US Federal Reserve, guardian of the world?s reserve currency, the dollar, and setter-in-chief of the closest thing to a world monetary policy, has had an extra tool at its disposal to get its job done: talk. The chairman of the American central bank could simply talk up or talk down the US currency with his utterances, thereby making it easier to negotiate tricky situations that require monetary policy to be loosened as a domestic economic stimulus while also ensuring that the dollar?s external value does not suffer in relation to other currencies. As global analysts see it, another such decision point is upon the US Fed right now. Containing the effects of the US subprime lending crisis has proven harder than earlier envisaged, and the risk of the US economy sliding into recession has reached a level that may simply necessitate an interest rate cut. But the dollar is also under pressure in currency markets around the world, with the long-expected unwinding of ?global imbalances? said to be finally underway, and keeping the greenback buoyed with just talk alone has become difficult. Still, the betting is that the US Fed will go ahead with a rate cut on the entirely reasonable assumption that key decision makers in other economies will not want to risk a collapse in the value of their dollar-denominated assets, and would be motivated to take measures to offset the effects.
Since other countries with an interest in the dollar?s direction and gradient also have domestic economies to worry about, a key question for them, as they factor a Fed rate cut into their calculations, would be the extent to which a US slowdown or even recession would lower their own growth rates. The hope that there would be no ripple effect whatsoever is based on wishful thinking more than economic analysis. But equally, be wary of simplistic links drawn on the basis of ?global integration? that suggest that a US slowdown makes a domestic one inevitable. Some effects of reduced American market demand on economies elsewhere around the world would be automatic, of course. But there are many others that would depend on the decisions that are taken at private and public levels around the globe. If global stability is the common rational aim, then the chances are higher of other economies? growth dips being manageably mild.
