US monetary policy over time

US monetary policy over time Through all of these phases, the US Federal Reserve was very restrained in its currency and monetary management decisions, and was mindful of its global responsibility, even as it was constrained by its national mandate. In parallel with this, US administrations were also aware of the importance of preserving the credibility of the dollar by limiting its deployment as a weapon. While other countries sought to manage their currencies with reference to the dollar, especially after 1971 when the fixed exchange rate system collapsed, the Federal Reserve largely ignored these interventions, seeing them as short-term ameliorative measures that were inevitable in the way the system had evolved since 1971. Moreover, they were too marginal to affect the value or status of the dollar, particularly as larger economies moved towards full currency convertibility, applying exchange rate management systems that were largely consistent with the US model.

One consequence of this arrangement was that the dollar was viewed not just as a market-determined reference point in its function as a store of value, but as a safe currency in which to hold and transact business. With growing economic and trade liberalization, international institutions such as the IMF and the World Bank built policy advice around assumptions of a stable and dependable dollar system, with other reference currencies in the same basket. Indeed, the removal of capital and currency controls, especially from the 1990s onwards, were predicated on these assumptions remaining valid.

The conflict between domestic mandate requirements and international responsibilities did precipitate an economic crisis on occasion. Perhaps the most dramatic was when the Federal Reserve raised interest rates in 1982 (from 5.85 percent to 20 percent) to deal with domestic inflation, simultaneously altering the debt obligations of many countries that defined their debt in dollar terms, and precipitating a global debt crisis. One further case is worth mentioning: the 1985 Plaza Accord which involved coordinated action to push the value of the yen up against other major currencies. This was seen as a corrective rather than a punitive measure. Today, the Japanese might not agree with this view.

Generally, however, the Federal Reserve was aware of its wider obligations and sensitive to monetary decisions that could and did affect countries around the world.

These concerns were often discussed and considered in established forums like the G20 or the Bank for International Settlements (BIS) and the Financial Stability Board. This spirit of cooperation was evident in the aftermath of the financial crisis in 2008 when the US used quantitative easing to stimulate economic activity, but actually altered the value and availability of the dollar in international markets, thus affecting investment flows.?