The world is starting to hate the Fed

A French leader once called the dollar America’s “exorbitant privilege.” Today’s world may prefer more blunt language. Vector of Pain, Anyone? Green monster?

Whatever we call it, the victims of the strong dollar have one culprit in mind – the Federal Reserve. Even Josep Borrell, the head of EU foreign policy, is involved. This week he warned that the Fed is exporting the recession in the same way the euro crisis was imposed by Germany’s post-2008 dictates. Much of the world is now in danger of becoming Greece.

Such finger-pointing is usually unfair to the Fed. The US Federal Reserve has maintained its “team transitory” rejection of inflation for too long and is fast tightening to restore credibility. But it just follows the rules. It’s hard enough to achieve full employment in the US with low inflation. Adding the welfare of foreigners to its mandate would make the job cripplingly complex. Still, the Fed is the engine of the global contraction. Money pain is America’s fastest growing export.

The great unknown is who will pick up the pieces. Here the USA as a world power was often neglected. In today’s so-called polycrisis world, one also risks missing an opportunity to restore America’s brand. The Fed has one tool – monetary policy. Higher US rates are spreading at pandemic speed.

Overall, the US has many options. One such lever is the Bretton Woods institutions – the IMF and World Bank, which are holding their annual meetings in Washington this week. The question is, will the US want to cushion the blow to developing countries if its debt servicing costs go through the roof?

History tells President Joe Biden which path not to take. The last phase of severe Fed tightening began in the late 1970s under Paul Volcker. Higher US interest rates helped trigger far deeper recessions in the Global South. Africa and Latin America both suffered a lost decade of growth, deepened by the IMF’s punitive regime. Structural adjustment was a cure worse than the disease. The 1970s had been awash with recycled Opec capital, making dollar borrowing difficult to resist. The Fed’s quantitative easing has had the same effect over the past decade.

It is of little consolation that inflation is less rampant today than it was 40 years ago. Emerging markets are worse off in some respects this time. Africa is neither responsible for the pandemic nor for the war in Ukraine. The first is to undo years of human development achievements. The second has triggered a wave of food and energy inflation.

Now the Fed is adding a potential debt servicing crisis to the cocktail. These upheavals do not originate in the Global South, but the costs are mainly borne there. Not to mention climate change, which is also worst in those parts of the world least responsible for causing it.

So far, Biden has found little bandwidth to meet these challenges. He had the chance to make US vaccine technology available to developing countries. In fact, he initially promised to suspend the patents on Covid vaccines. That now looks like an empty gesture as his administration has not followed suit.

As a result, a third of the world’s population has not yet received a vaccine, while most westerners have had at least two — some as many as five. Had the US taken stronger leadership, inflationary global supply shortages would not have been so chronic.

Biden’s $1.9 trillion stimulus — the American Rescue Plan — threw fuel on an inflationary fire that’s coming back to haunt Democrats. If they lose control of Congress next month, this bill will be partly to blame. So is the roughly half-trillion-dollar student-loan forgiveness he announced in August.

But here, too, the rest of the world is feeling the brunt of imported austerity measures. The way to the hell is paved with good intentions. Not for the first time, progressive steps to help underprivileged Americans are regressive for the world’s underprivileged.

The Fed has earned some of the resentment it gets. It should have responded to inflation earlier, which would have meant a less punitive response. It’s not that inflation is hard to spot. In that regard, Fed Chairman Jay Powell deserves some blame.

But America’s great failing is political, not technocratic. The global face of the problem is the mighty dollar, but its causes run deeper. The US fails to notice the spillover effects of what it’s doing at home in big moments, which often come back to bite it. Call it exorbitant indifference.

edward.luce@ft.com