For the first time since the Asian and Russian crises rocked world financial markets in the late 1990s, U.S. monetary policy is as focused on the risks to global growth as it is on the domestic economy.
Driving the resurgent internationalism inside the Federal Reserve is concern about how dollar strength — reinforced by aggressive policy easing abroad — could keep U.S. inflation too low when the Fed’s policy rate is close to zero. Another worry is a global economy that’s lumbering along without a prominent engine of growth, said Jon Faust, a former adviser to Fed Chair Janet Yellen.
“We have learned that the world is a more fragile place,” said Faust, who is now the director of the Center for Financial Economics at Johns Hopkins University in Baltimore. “At times like this, you don’t want to risk a significant slip because globally there are so few economies with really strong policy options.”
The Fed’s decision Wednesday to hold its benchmark rate target at 0.25 percent to 0.5 percent and lower the path of future hikes comes after global finance ministers and central bank governors agreed in Shanghai last month to use all policy tools to strengthen growth. Yellen and U.S. Treasury Secretary Jacob J. Lew were among the participants at the Group of 20 meeting.