FED and its effects globally

FED (Federal Reserve System)

The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics (particularly the panic of 1907) led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.

What is the mission of the US Federal Reserve?

Over time, the structure of the Fed has changed and its mandate has expanded. The monetary policy role is articulated by the Fed in the Federal Reserve Act, as amended in 1977 with the following key responsibilities:

  • Implement national monetary policies by creating jobs for Americans, stabilizing prices, and adjusting interest rates appropriately for the long term.
  • Maintain stability for the economy as well as control systemic risks that may arise in financial markets. Stabilize prices of products and services to encourage economic growth.
  • Supervising banking institutions while ensuring the financial safety system and people’s credit rights stably.
  • Provides financial services to foreign official institutions, valuable asset managers, and the US government. The Fed also plays a key role in running the national payments system.

Why can the Fed have an impact on the global economy?

When the Federal Reserve sees the CPI (Consumer Price Index) rising, commodity prices are on the high side; This shows that inflation is becoming serious. The Fed will proceed to restrain the price increase of goods to stabilize the economy. This organization makes some adjustments to interest rates (namely increases interest rates), tightens the money supply through selling Treasuries, and increases reserve levels of member banks.

When the Fed raises interest rates, all lending activities of businesses and individuals will face difficulties. Not only the US but the whole world is affected by the adjustment of monetary policy of the Fed.

Effects of the Fed on global finance

An increase in interest rates by the Federal Reserve will increase the public debt burden. Most countries use USD (US Dollar) for international payments (such as public debt), and the increase in interest rates will increase the USD exchange rate against the domestic dong; hence, the country with the debt becomes more indebted.

Because the Fed’s interest rate hike has affected other countries’ exchange rates. Then the yield of USD will be more attractive to investors; The strong selling of local currencies to buy USD will lead to an escalation of the exchange rate. This makes it difficult for countries to import raw materials.

The Fed raised interest rates and also caused other countries to “run” to raise interest rates as well. Partly because of the fear that the domestic currency will lose value against the USD and; at the same time fear of “importing” inflation.

When the Federal Reserve raises interest rates, the central banks of other countries raise interest rates; Meanwhile, commercial banks of other countries will also increase lending rates. This seriously affects businesses and individuals who need to use capital.

It can be seen from having to stabilize the inflation situation in the US, the Fed can affect the entire economy. Specifically, many businesses have to cut staff, leading to unemployment; spending became difficult and the economy entered a recession.


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