When The Fed Hikes Rates, It Harms Weaker Economies
Once again the Federal Reserve Board has raised the federal funds rate in an effort to cool off the U.S. economy in fear of an inflation that nobody is able to detect ("Who'd catch pneumonia if the U.S. sneezes," American News, May 22). The recent increases in the consumer price index (CPI) and producer price index (PPI) were caused by relative price accommodations within the economy, due to a much-needed oil price raise.
The increase in the CPI and PPI during March and April above Wall Street expectations was a one-time event, as was shown by the negative PPI figures after oil prices receded. The May CPI was flat. This is not inflation but a relative price change that occurs in any economy.
The Fed move will contribute little to slowing down the economy and a lot to maintaining a booming U.S. economy through "flight to quality" (or to the U.S.) of funds otherwise invested in the rest of the world.
The deterioration of most of the world's currencies against the U.S. dollar, the drop in price of developing countries' debt, the growing trade deficit in the U.S., the drop in U.S. import prices, and the weakness in American companies' earnings from international operations prove that assertion. Also, those countries that tied their currencies to the U.S. dollar, as did Argentina, are in a deep recession.
The U.S. won't see any inflation because the rest of the world is in different degrees of economic slowdown. By strengthening the dollar and raising interest rates, the U.S. will be able to put a check on internal prices and maintain the booming economy, while the rest of the world moves into a deeper recession.
The U.S. will continue to enjoy the benefits of globalization yet it should have the fairness to recognize the worldwide effects of its economic policies and act accordingly. The present world economy requires a more responsible U.S. monetary policy to make globalization acceptable to the rest of the world.