International Linkages

 

The Federal Reserve’s actions to adjust U.S. monetary policy are designed to attain basic objectives for the U.S. economy. But any policy move also influences, and is influenced by, international developments. For example, monetary policy actions influence exchange rates. The dollar’s exchange value in terms of other currencies is therefore one of the channels through which U.S. monetary policy affects the U.S. economy. If Federal Reserve actions raised U.S. interest rates, for instance, the foreign exchange value of the dollar generally would rise. An increase in the foreign exchange value of the dollar, in turn, would raise the price in foreign currency of U.S. goods traded on world markets and lower the dollar price of goods imported into the United States. By restraining exports and boosting imports, these developments could lower output and price levels in the economy. In contrast, an increase in interest rates in a foreign country could raise worldwide demand for assets denominated in that country’s currency and thereby reduce the dollar’s value in terms of that currency. Other things being equal, U.S. output and price levels would tend to increase just the opposite of what happens when U.S. interest rates rise.

 When formulating monetary policy, the Board of Governors and the FOMC draw upon information about and analysis of international as well as U.S. domestic influences. Changes in public policies or in economic conditions abroad and movements in international variables that affect the U.S. economy, such as exchange rates, must be factored into the determination of U.S. monetary policy.

Conversely, economic developments in the United States, including U.S. monetary policy actions, have significant effects on growth and inflation in foreign economies. Although the Federal Reserve’s policy objectives are limited to economic outcomes in the United States, it is mutually beneficial for macroeconomic and financial policy makers in the United States and other countries to maintain a continuous dialogue. This dialogue enables the Federal Reserve to better understand and anticipate influences on the U.S. economy that emanate from abroad.

The increasing complexity of global financial markets combined with ever increasing linkages between national markets through trade, finance, and direct investment have led to a proliferation of forums in which policy makers from different countries can meet and discuss topics of mutual interest. One important forum is provided by the Bank for International Settlements (BIS) in Basel, Switzerland. Through the BIS, the Federal Reserve works with representatives of the central banks of other countries on mutual concerns regarding monetary policy, international financial markets, banking supervision and regulation, and payments systems. The Chairman of the Board of Governors and the president of the Federal Reserve Board of New York represent the U.S. central bank on the board of directors of the BIS. Representatives of the Federal Reserve also participate in the activities of the International Monetary Fund (IMF) and discuss macroeconomic, financial markets, and structural issues with rep­resentatives of other industrial countries at the Organization for Economic Cooperation and Development (OECD). Following the Asian Financial Crises of 1997 and 1998, the Financial Stability Forum (FSF) was estab­lished to enable central banks, finance ministries, and financial regulatory authorities in systemically important economies to work together to address issues related to financial stability. The Federal Reserve also sends delegates to international meetings such as those of the Asia Pacific Eco­nomic Cooperation (APEC) Finance Ministers’ Process, the G-7 Finance Ministers and Central Bank Governors, the G-20, and the Governors of Central Banks of the American Continent.

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