Today, the No. 1 priority for the Federal Reserve and the White House is controlling inflation at home — even if it means economic pain for the rest of the world.
Treasury Secretary Janet Yellen has had some success in rallying an international response to Russia’s invasion of Ukraine. She persuaded G7 leaders to back a cap on the price of Russian oil in a bid to avert a major supply shock and a deeper global downturn next year. This week she publicly urged U.S. allies to accelerate economic support for Ukraine.
“That’s just the reality, and everyone recognizes that,” said Josh Lipsky, Atlantic Council GeoEconomics Center senior director and a former IMF and State Department aide. “So that’s the tension. It’s not that the Fed and the Treasury Department can come to the G20, or the IMF meetings and say, ‘We are all going to do X together in a coordinated way.’ It’s different now.”
Nations around the world are facing strain from the surging value of the dollar, which makes their dollar-denominated debt payments more expensive and increases the cost of imports — further feeding inflation in their economies. Higher rates in the U.S. have also led to an exodus of cash away from riskier foreign markets and into American ones.
Europe has potential leaders such as Christine Lagarde, the European Central Bank chief and former IMF head who helped engineer the global response to the European debt crisis a decade ago. But Lagarde, like Fed Chair Jerome Powell, is hamstrung by elevated inflation that has forced the central bank to rapidly tighten policy this year.Other European leaders are focused primarily on ensuring the bloc can get through this winter amid skyrocketing energy prices and a looming recession.
Where the Fed might have once backed off policy tightening over the prospect of global weakness, officials are now reluctant to blink in the face of high inflation, said Eric Robertsen, global head of research at Standard Chartered bank. The coronavirus pandemic hasn’t fully subsided, and many economies are far less recovered from it than the U.S., even as they struggle to tamp down their own domestic inflation. Meanwhile, the conflict in Ukraine has made a recession in Europe all but certain.
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