Friday, June 21, 2013
The US Fed Acts, The Rest Of The World Reacts
The Fed believes that the US economy may no longer need supportive monetary policy. It signaled that it would cut back on its purchase of securities which has kept US interest rates well below their normal level. While that might mean good news for the US economy, it sent a message across the globe that credit will become more expensive. It also raised concerns that the move may be premature and that the US economy, faced with contractionary fiscal policy, may slow down. In a sense, the Fed has been acting as the central bank for much of the world which depends upon sales in the US. The global markets have responded. Stock prices fell in most of the world, and the price of US treasuries fell, which in turn will drive up mortgage interest rates and imperil the critical US housing market. What happens in the US doesn't stay in the US. The economy is indeed global. What happens in the US, and increasingly in China, affects markets everywhere.