The Global Spillover Effects of the Fed’s Rate-Hiking Campaign

Happy Thursday! The James Webb Space Telescope continues to astound, with NASA releasing pictures yesterday the JWST took of the famed Pillars of Creation.

Quick Hits: Today’s Top Stories

• Russian President Vladimir Putin on Wednesday declared martial law in four Ukrainian regions—Kherson, Zaporizhzhia, Donetsk, and Luhansk—that Russia claims to have recently annexed despite not having full military control of any of them. The move ostensibly grants officials additional powers—including detention, resettlement, and internment—and Russian-installed authorities have reportedly begun moving Ukrainians out of Kherson and away from Ukraine’s advancing military forces.
• President Joe Biden announced Wednesday his administration will release another 15 million barrels of oil from the Strategic Petroleum Reserve (SPR) in December in an effort to lower gas prices. Although the announcement comes just weeks before the midterm elections, Biden was adamant the move was “not politically motivated at all.” With about 405 million barrels of oil currently in storage, the SPR is at slightly more than half its 714-million-barrel capacity—its lowest level in nearly 40 years. Citing a new Department of Energy rule allowing the agency to enter into fixed-price contracts with suppliers, the White House announced its intent this week to begin refilling the SPR by purchasing oil once crude prices fall to about $67 to $72 per barrel. 
• Real estate brokerage Redfin reported Wednesday that the U.S. housing market slowed dramatically in September, with the number of homes sold falling 25 percent year-over-year—the largest such drop on record aside from the earliest few months of the pandemic. The median home-sale price decreased 0.5 percent from August to September, but remains 8 percent higher than it was in September 2021.
• The Food and Drug Administration (FDA) announced Wednesday it was authorizing a booster shot for Novavax’s protein-based COVID-19 vaccine that, unlike Moderna and Pfizer’s booster doses, targets only the original SARS-CoV-2 strain, not any Omicron variants. The booster is authorized for those 18 and older who are at least six months past their initial vaccination and cannot or will not receive an mRNA booster. The Centers for Disease Control formally recommended the Novavax booster hours after its FDA approval, including for people who received Moderna and Pfizer shots as their primary series. 
• North Korea has fired off about 350 artillery shells into the sea off both its east and west coasts since Tuesday, according to South Korean military officials. The tests follow numerous missile launches in recent weeks, and come as South Korea conducts its annual Hoguk defense drills. 
• John Lee, Hong Kong’s new Chinese Communist Party-approved chief executive, delivered his first policy address on Wednesday, announcing aspirations to counteract the “brain drain” that’s sapped the special administrative region of nearly 140,000 workers in two years. Though many analysts attribute the exodus to Hong Kong’s crackdown on civil liberties and strict COVID-19 policies, Lee proposed granting two-year visas to high earners and graduates of top universities around the globe to reverse the trend.

‘The Fed is Not Making Everyone Else’s Job Easier’

Lately, the United States Federal Reserve has been like the world’s biggest bull charging through the china shop of the global economy—trailed by a herd of smaller banks mooing their annoyance.

There are plenty of other factors affecting the global economy—COVID-19 lockdowns in China, big government spending, the war in Ukraine—and the Fed’s job is to focus on the U.S. But as the central bank of the world’s largest economy, its aggressive rate hikes reverberate worldwide.

America’s job market is still hot, so Fed chair Jerome Powell and his band of bankers have been focused on tamping down inflation this year, jacking up interest rates by 50 and 75 basis points at a time and telegraphing another big hike in November. Since higher interest rates make borrowing more expensive, the idea is to discourage demand and cool the U.S. economy enough that inflation stops gaining steam.

But those higher interest rates also help strengthen the dollar by attracting investors who can get a better bang for their buck in the U.S. bond market—they’ll earn more interest than in other currencies where central banks haven’t been quite as aggressive. The dollar’s reputation for stability and strength is also attractive amid increasingly uncertain economic conditions worldwide. Compared to a basket of other currencies, the dollar’s value has surged by nearly 18 percent this year.

An especially strong dollar has a host of implications—many of them uncomfortable for other countries. About half the world’s international debt is denominated in dollars, meaning countries must make interest and principal payments in our now more expensive currency. Lulled by a decade-plus of low interest rates, nations have been borrowing at record rates, led by advanced economies and China. COVID-19 relief spending exacerbated the problem. Global borrowing jumped by about 28 percentage points in 2020, according to the International Monetary Fund, and government borrowing accounted for about half that growth.

Plus, essential commodities like oil and wheat—already pricier thanks to Russia’s invasion of Ukraine—are often bought and sold in dollars, so countries looking to import these essentials are spending more of their currency to get the same goods. In effect, our efforts to bring down inflation at home are driving it up abroad. “Most of the world has some variation of inflation challenges, and their central banks are also trying to solve their own problems,” said Brian Blank, an assistant professor of finance and economics at Mississippi State University. “And yeah, the Fed is not making everyone else’s job easier.”

Already some nations have had to bail out their economies. Last month, Japan spent nearly $20 billion buying yen in the foreign exchange market, a bid to strengthen the currency after its central bank kept interest rates low. Days later, a British spending proposal that investors feared would increase inflation triggered a selloff on the British bond market until the Bank of England stepped in, promising to buy government bonds “on whatever scale” needed to restore stability.

The Fed doesn’t see inflation or currency instability elsewhere as its problem, since its job begins and ends with the U.S. “My role is to focus on the Fed’s dual mandate to promote maximum employment and stable prices for the American people, which is a domestic mandate,” Lisa Cook, a Fed governor, said during a recent speech. But, she added, the Fed is “very attuned” to how international conditions affect the U.S. economy.

The World Bank warned last month that simultaneous interest rate hikes from a bunch of central banks could trigger a lasting global recession. “Global growth is slowing sharply, with further slowing likely as more countries fall into recession,” World Bank Group President David Malpass said in a statement. “My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies.”

Other central banks haven’t had the Fed’s hot home economy to back their inflation control efforts. Take the European Union, where the European Central Bank (ECB) has set interest rates below U.S. rates for a while. It’s been raising rates of late—notching a 75 basis point hike in September—but still may not match the Fed, partly because Europe’s economies are more exposed to the energy price shocks of Russia’s war against Ukraine. “Germany, for example—inflation is a concern that they have, but it is not their primary concern,” Blank said. “They’re much more concerned about having enough energy to keep their factories running and keep their economy going, and so their policy is more focused on stabilizing their economy than it is on combating inflation.” And though China’s severe lockdowns in pursuit of eradicating COVID-19 have affected supply chains around the globe, they’ve felt the biggest effect at home. The World Bank has gone from projecting 5.1 percent gross domestic product growth in China this year to 2.8 percent.

So while the Fed’s behavior may tighten the screws for other countries, it’s not the only signal other central banks are watching. “I don’t think that the Fed’s action will have much of an impact on the ECB’s path,” Brad Setser, economist and senior fellow at the Council on Foreign Relations, told The Dispatch. “The evolution of the war [in Ukraine] and the impact of tightening of sanctions on the Russian oil trade will have a bigger impact on the ECB’s decisions just because they have a bigger direct impact on Europe’s economy.”

Still, once the Fed determines inflation has fallen enough to call off the china shop rampage, central banks elsewhere may be able to slow their paces, too—ideally before contributing to widespread economic downturns.

“Not tightening enough would cause inflation to become de-anchored and entrenched, so with us for a long time,” Kristalina Georgieva, IMF managing director, said in a recent speech at Georgetown University. “And that would require interest rates to tighten even more to bring it down, and that would cause tremendous harm on people, but also on prospects for growth. On the other hand, if we tighten too much, too fast and do so in a synchronized manner, we can push many economies into prolonged recession.”

Announcing The Dispatch’s Second Regional Event: Chicago!

After the incredible turnout at our first-ever Dispatch regional event outside Nashville a few weeks ago, we couldn’t wait to get the next one on the schedule. And of course, we had to prioritize the greatest city in the world. [Editor: Because the previous claim is an opinion, it’s not subject to a Dispatch Fact Check. But those of us from Milwaukee think of Chicago as one of our nicer suburbs.]

Join Sarah, Steve, hometown boy Declan, and fellow members of The Dispatch community at Midwest Coast Brewing in Chicago on Thursday, November 3, for an informal meet-and-greet event. We’ll cover drinks for the first hour-and-a-half of the event, and members are welcome—encouraged, even!—to bring their significant others and/or people who might be interested in The Dispatch. Anyone who attends as a guest of a member will be eligible for a three-month free trial.

More details can be found here and below. We hope to see you in two weeks!

Where: Midwest Coast Brewing Co., 2137 W Walnut St. Chicago, Illinois 60612

When: November 3 from 6-10 p.m. CT

Registration: https://forms.gle/GDmit4GCNBkjYvkF8

Worth Your Time

• In a piece for Law & Liberty, University of Alabama political science professor George Hawley makes the case for experimenting with ranked-choice voting. “RCV will not be a panacea for our political challenges. The nastiness of our elections and the ideological incoherence of our two major parties will not be immediately resolved by changes in our voting rules,” he writes. “Experiments with RCV nonetheless deserve support. As more places introduce different versions of RCV (including some that combine RCV with multi-seat districts), we will get a sense of whether certain kinds of candidates are systematically disadvantaged. Sometimes RCV rules require voters to rank all candidates on the ballot in order to be counted, but this is not always the case, and there are potential advantages and disadvantages to both systems. Perhaps RCV will introduce new and unforeseen problems into our elections, and RCV will be quickly and understandably jettisoned. Historically, some local governments briefly used RCV and subsequently abandoned the practice, which is perfectly reasonable if people in those communities found that the system failed to meet expectations.”
• Is the prominence of public opinion polling in American political journalism damaging our democracy? “One of the challenges [with] coverage of polls in general is that there’s a sense in folks who cover politics for a living that everybody is following politics for a living,” Democratic pollster Margie Omero told Jane Coaston on this week’s episode of The Argument podcast. “[Most voters] are not following the polls. They are not like, ‘Well, I should be doing this because I read the Suffolk poll, but then Monmouth had a poll.’ Like, that’s not where voters are, and it’s because they have a different job. Their job is not the same as our job, and we should not expect folks to be following these things closely.” Nate Silver, FiveThirtyEight’s founder and editor-in-chief, had a slightly different outlook. “At some point, I think if you’re a journalist of any kind, you have to have some faith that people use information wisely,” he said. “I also think, though, that journalists sometimes do a disservice because they don’t understand probability very well, and they misinterpret polling in ways that lay people actually may have better intuitions for. Sometimes I think things get lost in translation.”
• Washington Post data journalists Yan Wu and David Byler compiled and analyzed more than 1,000 of the most popular TikTok posts about abortion. Their conclusion: The Chinese-owned video-sharing platform is “almost perfectly designed” to further divide us. “TikTok’s basic design—an unending stream of short videos so entertaining you can’t look away—encourages users to suffuse their arguments with emotion, humor and urgency,” they write. “The resulting arguments often rely more on emotional impact than point-by-point engagement with the other side.” TikTok’s algorithms, they continue, “track users, learn what they like and deliver them more and more of it. The app can provide politically interested users a steadily increasing dose of partisanship and extremism. The resulting debate is bifurcated and bitter: Liberals dunk on conservatives; conservatives preach to the choir; and the algorithm ushers people into whichever echo chamber they already prefer. And when the TikTok debate breaks into real life, the tactics are bare-knuckle—such as hacking a Texas abortion website or doxing the Supreme Court.”

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Toeing the Company Line

• On today’s episode of Advisory Opinions, David and Sarah check in on the latest developments in the Durham investigation, provide an update on the special master in the Mar-a-Lago documents case, and take a look at the growing list of legal challenges to President Biden’s loan forgiveness plan. Plus: Should Texas Pete Hot Sauce have to change its name?
• The inimitable Yuval Levin joins Jonah on today’s episode of The Remnant for a philosophical yet accessible conversation on the responsibilities we face as members of a free society. What’s the best way to approach political and civic life in the United States? How should we treat our institutions? Why is cynicism harmful? Can higher education be fixed? And is the internet damaging democracy?
• What do Donald Trump and Liz Cheney have in common? They both agree that some things are more important than party loyalty. “The Never Trump contingent and its archenemies in red MAGA caps are each willing to see the left win for a while in the name of influencing how the Republican Party behaves afterward,” Nick writes in the latest edition of Boiling Frogs (🔒). “We have that much in common.”
• Scott couldn’t resist taking another swing at occupational licensing after a Texas-licensed roofer was arrested for repairing a home damaged by Hurricane Ian in Florida. In Wednesday’s Capitolism (🔒), he argues the growing requirements for these licenses harm workers, consumers, and the U.S. economy.
• On the site today, Audrey Fahlberg dives into the campaign of a self-styled moderate Democrat running against GOP nominee Joe Kent in Washington’s 3rd District and Frederick Hess argues against a proposal to allocate $500 billion in additional spending to education-related pandemic relief.

Let Us Know

Anent Nancy Pelosi’s advice for Democrats: Would better “messaging” from politicians change the way you think about inflation?