NEW YORK – This is supposed to be the era of powerful central banks, ready to wield their firepower worldwide. Yet the most powerful of all central banks – the United States Federal Reserve – is also the most reluctant to acknowledge its global reach.
Like all central banks, the Fed has a local mandate, focused on domestic price stability and employment. But, unlike most central banks, the Fed has global responsibilities. This tension is at the root of some of the most threatening problems facing the world economy today.
The Fed has global responsibilities for two closely related reasons, neither of which has much to do with the need to avoid the “currency wars” that so concerned former Brazilian Finance Minister Guido Mantega.
First, despite the birth of the euro and talk of the Chinese renminbi’s ascendancy, the dollar remains the currency of choice for borrowing and lending around the world. When a bank or corporation in Kuala Lumpur, São Paulo, or Johannesburg borrows abroad, the loan is more likely to be denominated in dollars than in any other currency.