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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