The Fed's International Data Dichotomy

The Federal Reserve Board is meeting to decide whether or not to raise interest rates.  The costs and benefits of its decision, whichever way it goes, will fall to a large degree along international borders.

Most of the data favoring a rate hike are domestic.  The U.S. economy is growing, moderately but steadily (especially after data revisions).  Unemployment has fallen to the level generally regarded as full employment.  Jobs growth continues, not at a blistering pace but indicative of continued expansion.  Inflation is very low, but if you strip out energy and food prices (which are volatile), the rest of the price structure is pretty close to the Fed's 2% target.

Most of the data arguing against a rate hike is from overseas.  Chinese stocks have been volatile and China's growth is slowing.  Europe's and Japan's economies are  barely growing.  Emerging nations and commodities producing nations are on the ropes, with many facing shrinking economies.  The Greek debt crisis has temporarily simmered down, but the most recent "resolution" was just another kick of the can down the road.  So we can be confident that a Greek default will loom anon, and we'll have to revisit familiar angst.  A rate increase will strengthen the dollar, which will possibly exacerbate these international problems.

Much of foreign anxiety stems from the fact that the dollar is the international medium of exchange.  The entire world uses the dollar in numerous trade and cross-border transactions.  The Fed's monetary policy unavoidably affects people in distant lands.  A rate hike may help the domestic economy by easing asset distortions and increasing certainty (and desperately desired income for savers).  It is likely to have a negative impact overseas.  No wonder the IMF and other voices reflecting foreign perspectives argue against a rate hike.

What will the Fed do?  Most likely, not even the Fed knows before its meeting.  We've been told that its decision is data dependent.  What we don't know is how it weighs and balances the data.  What data receive greater consideration?  What data are downplayed?  What thought is given to the effect of the Fed's decision on foreign relations? Central banking is distinct from diplomacy, but the Fed can't ignore foreign concerns.  A rate hike will produce smiles and frowns, mostly on different sides of the border.  After World War II, America became the pre-eminent economic power in the world, and it cannot now avoid the consequences of its dominance.