U.S. Federal Reserve Chair Janet Yellen said Friday she sees a "stronger case" for raising interest rates for the dollar, citing the solid performance of the labor market and positive outlook for economic activities in the country.
While it is common for a central bank to adjust its monetary policies according to the realities of the domestic economy, the Fed must take a step further by evaluating possible spillovers from any of its decisions, given the status of the dollar as the primary global currency.
The greenback is ubiquitous in global trade, and it accounts for over 60 percent of global foreign reserves, according to a recent IMF report.
The dollar dominance brings Uncle Sam many benefits, aside from a lavish lifestyle financed by cheap borrowing from the rest of the world.
For example, in tackling the 2008 financial crisis, Washington repeatedly used quantitative easing measures -- the essence of the approach is first introducing a deluge of dollar cash to dilute the problem and then let it spread across the world.
In this sense, the U.S. economic recovery is happening thanks in no small part to sacrifices by countries that held sizable dollar reserves.
It would only be logical that the United States, after moving toward new prosperity, offer help to other countries that are still suffering economic stagnation or facing risks of sustained contraction.
Yellen and her colleagues in the Fed know too well that hiking interest rates too soon could trigger capital flows to the United States from emerging markets, and such a scenario will definitely further burden these economies that are already caught in various economic adversities.
And they also have to consider other less fortunate developed economies, many of which have only limited choices now in their monetary policy toolkit to stimulate growth.
After years of globalization, economies in different parts of the world have become increasingly interdependent. Financial instability in smaller economies could sow the seeds for disasters that transcend national borders.
Haste makes waste. The fact that the Fed has stayed put following its last rates hike in December, also the first in nearly a decade, shows that the U.S. central bank is indeed treading cautiously and it knows such an approach is in the best interest of the United States.
For the good of the global economy and for its own sake, the Fed should not rush to decide on a rates hike based only on U.S. economic data. Instead, it should adopt a broader vision and take concrete actions to improve coordination with other central banks so as to make the global financial system more resilient.
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