The Fed’s influence on the global economy

It is undeniable that the United States It is the most powerful country in the world. It is therefore not surprising that any economic and political policy In Uncle Sam’s country will be of interest to other countries around the world, including the monetary policy used in that country.

If Indonesia has an Indonesian bank central bank and monetary policy agencies The United States has the Federal Reserve, commonly known as the Fed, as the institution that manages this single policy. What is the Fed and how will this single institutional policy affect the global economy? Check out the following discussion:

What is Fed?

Federal Reserve Reserves, or Fed, are the highest financial powers in the United States. This independent institute Now headed by Jerome Powell, it was first established in 1913 as people’s desire for centralized control of finance grew after the financial panic a few years ago.

Simply put, the function of the Fed is threefold: maximizing employment. keeping prices stable (controlling inflation) and maintaining interest rates in the long term. However, along with various economic phenomena that occurred after the establishment of this institution The role of the Fed has also increased. according to the official website The functions of this institute are to:

1. Execute monetary policy to increase employment Control inflation and maintain interest rates
2. Improve financial stability and maintain financial system risks by actively monitoring domestic and international financial activities.
3. Supervise the security of financial institutions accordingly (such as banks and other financial institutions).
4. Develop an efficient and efficient payment and settlement system in the United States.
5. Promote consumer protection and community development by developing consumer-based governance and governance. Conduct research and analysis on consumer trends and issues. Community economic development activities and the establishment of consumer laws and regulations

The Fed is an independent institution that cannot influence the decisions of the United States government. The Fed remains accountable and its performance is reviewed by Congress (a type of DPR).

The Fed’s influence on the global economy

As the financial authority of a superpower any decision The Fed’s impact can affect the global economy. Here are some of them:

1. Interest rate policy

In the first half of 2022, US inflation increased by more than 8%, in addition to the consequences of the war between Russia and Ukraine. It is also a result of the government’s policy to loosen the economy so that it can recover from Covid-19.

You have to keep in mind that inflation can be caused by large amounts of money circulating in the community, so one way to overcome this is to raise the benchmark interest rate. in the context of the United States reference interest rate this is called Federal Capital Rates (FFR).

Because what is being discussed is the US benchmark interest rate. The Fed’s policy to increase FFR could have internal effects on the United States itself and externally in other countries. including Indonesia

Internally. An increase in FFR will also drive interest rates on loans and savings. The hope is that people will be more diligent in saving. do not borrow money from the bank money supply will decrease Inflation will also decrease. Externally, an increase in FFR will affect the economy of other countries through the exchange rate channel known as forex.

2. The Fed’s Interest Rate Affects Exchange Rates

Before knowing how the Fed’s decision to raise interest rates will affect the exchange rate of the dollar against the rupiah. You need to keep a few things in mind, namely:

1. The exchange rate in the exchange rate is the same as the price of a foreign currency if purchased in another currency. For example, the USD exchange rate for the IDR is the same as the dollar price when purchased in Rupiah.
2. Foreign exchange rates can change at any time according to the law on supply and demand. Also known as if the demand for currency is high. The value of a currency will increase (appreciate) compared to other currencies.
3. forex traders and other financial instruments These tools can be traded freely from different countries simultaneously.
4. Reference interest rates in forex And bonds can mean the yield or profit offered.

In the context of the Fed’s interest rates, the Fed’s FFR policy invites traders to buy dollars and sell other currencies. (in the context of exchange rates) or buy US government bonds (US Treasury Bonds) if the currency used to purchase both financial instruments is Rupiah. The dollar against the Rupiah (USD/IDR) will strengthen. Also known as the dollar price is more expensive.

3. The Fed’s interest rate affects imports and foreign debt.

The ever-expanding dollar exchange rate Compared to the rupiah, it affects two things: imports and foreign debt. The reason is that the dollar is the currency used to purchase imported goods. and used to pay off foreign debts

For example, when $1 equals Rs.10,000, Mr. A can import 1 kg of Himalayan salt, which costs US$100, for only Rs.1,000,000. However, when $1 is Rs.10,000, Mr. A now buys only Rs.1 of Himalayan Salt. kilograms for 1,500,000 rupees

The same is true for foreign debt. For example, Indonesia has $100 foreign debt, when 1 dollar equals Rs 10,000, Rp 1,000,000 can be repaid. However, when the dollar price increases to 1 USD equivalent to 15,000, Rp 1,500,000 is now required to pay off the debt.

Increases in import costs and debt will drive price increases (inflation) for other economies. If debt and imported goods are essential goods for the community, such as fuel, wheat (for instant noodles and flour), etc.

4. The Fed’s Interest Rate Affects Other Countries’ Reference Rates

The increase in the price of oil and other essential commodities The above will trigger more inflation. Therefore, an increase in FFR in the United States is generally followed by an increase in the benchmark interest rate in other countries including Indonesia with an increase in BI7DRR. The benchmark interest rate in developing countries is therefore higher than the FFR.

In addition to controlling inflation This action also aims to give traders the advantage of holding the higher Rupiah. So that the exchange rate of Rupiah to the dollar remains stable. with a stable exchange rate of rupiah to dollar Prices of imported goods will also stabilize and there is little debt the government has to pay. in the midst of the opening of the market (openness) The current global economy Crisis in one country can spread to another country quite easily. Good monetary policy is one way to avoid the impact of the epidemic.