https://bt.sg/3kHuPowell vs Putin: US Fed faces the great geo-economic transformation
LEON HADAR
[WASHINGTON,
D.C.] Washington - It has become a cliché to insist that the chair of
the US Federal Reserve, like other central bankers in the West, is an
apolitical public servant, and that his colleagues at the Fed are
"technocrats" whose decisions should not be influenced by political
considerations like an approaching presidential election.
While
that makes sense on some level, we all understand that central bankers
read newspapers and watch television and are aware of what is happening
around them, including the political reality, and have to take that into
consideration.
Hence,
current Fed Chair Jerome Powell understood that both Republican and
Democratic administrations and Congress had no choice but to respond to
the deadly global pandemic by spending trillions of US dollars and that
he had to join their efforts by turning on the financial spigots. The
public interest overrode real concerns that all of those steps would
ignite inflation, exactly what the US central bank is supposed to
prevent from happening.
The
ongoing conflict between Beijing and Washington, and US decisions to
limit the flow of high-tech goods to China and to impose tariffs on
Chinese imports, have led to talk about the "decoupling" of the American
and Chinese economies.
And
now with the US, Europe, Britain and Japan uniting to punish Russia
with unprecedented economic sanctions, some predict the international
system - and in that context the global economy - would be split between
two blocs, one headed by the US facing and the other, by Moscow.
It
may too early to make such predictions. But what has become clear is
that while the economic sanctions imposed on Russia have delivered major
blows to its central bank, commercial banks, business and political
leaders, they are also having devastating effects on the rest of the
global economy.
The
impact of this economic warfare is becoming evident every day: It is
driving up manufacturing costs for food, consumer goods and machinery
and leading to rising consumer prices. Things are about to get worse,
now that the US administration and Congress are on a path to ban US
imports of Russian oil, which is expected to raise global energy prices
to new highs.
Most
significant, perhaps from the perspective of the Fed, banning Russian
imports to punish President Putin for invading Ukraine, in addition to
the other efforts to isolate the Russian economy, threaten even more
inflation.
This
would is happening after the Biden administration and the US central
bank have been facing criticism for months over the inflation levels
that have reached a 40-year high and have been trying unsuccessfully to
tame rising consumer prices, with oil, gas and other commodity prices
soaring to the highest levels in years - and which was already happening
before the Russian assault on Ukraine.
Russia
is the world's third-largest oil producer, providing around 10 per cent
of global supply; restricting its flow risks higher energy prices in
general, and at the pump in particular.
The
impact of these developments on the global financial system as they
ripple through it is expected to be massive, not unlike the impact of
the 1973 Arab oil embargo, and could take the form of chain reactions
that could overwhelm Western financial institutions in unforeseen ways,
recalling the 1998 collapse of Long-Term Capital Management.
The
Fed would be aware of these and other risks and recognises that the
American economy (and in particular, the labour markets) were
overheating and fostering inflation before the Ukraine crisis, and are
now facing the threat of rising inflationary pressures.
So
whether Powell likes it or not, the US central bank has now become a
hostage of political decisions being made in Moscow, Berlin and Beijing,
over which it has no control.
But
at the same time, the monetary policy decisions he will be making in
the coming months could directly affect the American and global economy,
in the process turning him into a player in this geo-strategic and
geo-economic rivalry.
He
made it clear that he understood this during an appearance before the
US Senate Banking Committee last Thursday, suggesting that against the
backdrop of the war in Ukraine, "we are going to see upward pressure on
inflation at least for a while".
The
Fed, Powell he said, would have to be "alert and nimble as we make
decisions in what is quite a difficult environment" - "difficult" being
the understatement of the past week.
But
he was very explicit when it came to outlining the central bank's
policy actions, noting that he would propose a quarter-percentage point
interest-rate increase at the coming central bank's meeting, and that he
would follow that initial rate rise with a series of increases this
year.
He
admitted during his congressional testimony that in "this very
sensitive time at the moment, it's important for us to be careful in the
way we conduct policy because things are so uncertain, and we don't
want to add to that uncertainty".
To
put it in concrete terms, if the Fed succeeds in taming inflation in
the coming months, it would strengthen the resolve of the American
people and their leaders to continue mounting the economic pressure on
Putin and perhaps force him to end his aggression in Ukraine.
A failure on that front, however, would play directly into Putin's hands.