The Federal Reserve is laser-focused on stemming price increases in the United States, but countries thousands of miles away are reeling from its hardball campaign to strangle inflation, as their central banks are forced to hike interest rates faster and higher and a runaway dollar pushes down the value of their currencies, reported CNN this month.
The Fed’s decision to raise rates by three-quarters of a percentage point at three consecutive meetings, while signalling more large hikes are on the way, has pushed its counterparts around the world to get tougher, too, according to the report.
The dollar is up 18% this year and last month hit a 20-year high, according to the benchmark ICE U.S. Dollar Index, which measures the dollar against a basket of key currencies.
The reasons for the dollar’s rise are no mystery. To combat soaring U.S. inflation, the Federal Reserve has raised its benchmark short-term interest rate five times this year and is signalling more hikes are likely. That has led to higher rates on a wide range of U.S. government and corporate bonds, luring investors and driving up the U.S. currency.
In effect, the US has been exporting inflation during its pandemic rebound. That underscores a profound change in the global economy. In the pre-Covid world, goods were abundant and the challenge was finding buyers.
In the new age of scarcity, that story has been flipped on its head.
Now there are signs that American consumers are dialing it back as the Federal Reserve ratchets up interest rates to cool the economy and combat inflation.
For the rest of the world, that may just create a different headache as the US switches to exporting inflation through another channel: the super-strong dollar.
With rates in the US rising much faster than in the euro zone and Japan, the dollar is soaring.
To be sure, consumer demand is just one cause of the worldwide spike in inflation—arguably not the main one even in the US, where Covid stimulus was largest.