A French leader once called the dollar America’s “exorbitant privilege”. Today’s world might go for blunter language. Vector of pain, anyone? Green monster? Whatever we call it, the strong dollar’s victims have one culprit in mind — the Federal Reserve. Even Josep Borrell, the EU’s foreign policy chief, is joining in. This week he warned that the Fed was exporting recession in the same way the euro crisis was imposed by Germany’s post-2008 dictates. Much of the world is now in danger of becoming Greece.
Such finger-pointing is mostly unfair to the Fed. The US central bank clung for too long to its “team transitory” dismissal of inflation and is thus tightening at speed to restore its credibility. But it is only following the rules. It is hard enough to achieve full US employment with low inflation. Adding foreigners’ wellbeing to its mandate would make the job paralysingly complex. The Fed is nevertheless the engine of global contraction. Monetary pain is America’s fastest growing export.
The big unknown is, who will pick up the pieces. Here, as the world’s leading power, the US has often been prone to neglect. In today’s so-called polycrisis world it also risks missing a chance to restore America’s brand. The Fed has one tool — monetary policy. Higher US interest rates are spreading at pandemic speed.