In a recent statement, the head of the Federal Reserve (Fed), Michelle Bowman, signaled the possibility of a new change in US monetary policy, which will certainly have global implications. This information came to light during the Marrakesh Economic Festival in Morocco, an annual event coordinated by the International Monetary Fund (IMF) and the World Bank.
Bowman warned that in order to achieve the official inflation target, the Fed may need to raise interest rates and keep them at a restrictive level for a prolonged period. Currently, US inflation remains well above the official target of 2%, despite the Fed’s continued efforts to contain it.
The US economic scenario
In addition to inflation dynamics, Michelle Bowman also touched on other relevant economic factors. She mentioned that the US government’s fiscal spending continues to be robust, and that the labor market remains strong. Both factors, added to rising inflation, could justify additional monetary tightening.
What does monetary tightening mean?
A monetary tightening refers to an economic policy that aims to slow down the economy in order to contain inflation. This is done by raising interest rates, which makes it more expensive to borrow money and therefore discourages spending. With less money circulating in the economy, demand for goods and services can fall, reducing upward pressure on prices.
How do the Fed’s policies impact the world?
As the world’s largest economy, the monetary policies adopted by the United States have an impact on other countries. An increase in interest rates can lead to a flight of capital into the dollar, putting additional pressure on local currencies. In addition, it can make financing in dollars more expensive and thus impact companies in emerging countries that usually finance their operations in foreign currency.