Economic Network: How the Fed Could Lead the World into a Recession
https://www.nytimes.com/2022/10/07/business/economy/federal-reserve-global-fallout.html
The Federal Reserve is the central banking system of the United States. Like many central banks around the world, the Fed sets its policy with an eye on the domestic economy. However, the Fed’s efforts to ease inflation are raising the risk of a global recession and causing economic and financial pain in developing countries. The Chair of the Federal Reserve, Jerome Powell pledged to reduce inflation even if it increases unemployment to prevent the country from going into a recession. As of today, the Fed has raised interest rates for the fifth time this year. However, the effort seems inefficient as gas prices, rent, and healthcare costs soar. As the Fed increased interest rates to restore price stability in the US, other central banks in developed countries followed suit to fight their inflation. This can cause extreme damage to the poorer nations as these countries already have been dealing with a cost-of-living crisis and now American imports are growing more expensive as the dollar marches higher. As the value of the US dollar increase, it also makes it harder for developing nations to pay back their dollar-dominated debt and increase the cost of borrowing.
Trade and technology have made the world a more connected and interdependent place. Economic globalization increased the interdependence of world economies as a result of the growing scale of international trade, the flow of international capital, and the wide spread of technologies. This interconnectedness has created economic growth and prosperity. However, in times of economic downturn, this interdependence allows crises to spread like wildfire. Contagion is the spread of an economic crisis from one market or region to another because virtually all markets are connected through monetary and financial systems. If the Fed were to continue to raise the interest rate and with many other advanced economies following in the footsteps of the United States, a global recession is right around the corner. The countries that will feel the greatest distress will be low-income developing countries. The African Union has already called for more emergency assistance and debt relief. Although central banks make policy domestically, the effect is felt all over the world especially for the Fed as it is one of the most powerful central banks in the world.
Thinking of the networks we drew in class, the Fed will be a node in the center that links to many other central banks around the world. These may include the European Central Bank, Bank of England, Bank of Japan, Swiss National Bank, Bank of Canada, and Reserve Bank of Australia. These banks are also connected to each other. When the Fed raises the interest rate, other banks do the same. With the world economy so connected, the decision of one powerful central bank can have an effect on the rest of the world. This could also be a result of the banks following the crowd. They see other central banks increasing the interest rate, so they also raise interest rates. In the end, economic globalization has resulted in interconnectedness and is dragging the world economy towards a recession.