The United States Federal Reserve’s tightening of monetary policy through raising interest rates which began in March this year is to continue despite the flat inflation line for July compared to June this year and the suddenly positive job statistics for July. The rest of the world, especially developing economies in Asia, look with a little apprehension at the rising interest rates in the US because it affects their own economies as funds are sucked out of their own domestic economies.

But Federal governors of different states in the US that the inflation in the country is still too high at 8.5 per cent though it has come down from 9.1 per cent in June. Of course, the pump prices of petrol in the US have fallen below $4, but that does not mean the economy is back to good times. That is the message from the policymakers. Minneapolis Federal Bank President Neel Kashkari said the Fed is “far, far away from declaring victory” over inflation. He feels the interest rate is to be raised to 3.9 per cent by year-end, and to 4.4 per cent by end of 2023.

The interest rate is now in the 2.25 per cent to 2.5 per cent range. Kashkari, who is considered a hawk when it comes to taming inflation, feels that inflation must be brought down to two per cent even if it means risking recession. The risk of recession will not deter me, he says.

San Francisco Fed President Mary Daly also feels that the battle against inflation is not yet over, but she feels that half percentage point rise should be the baseline though she has not ruled out 0.75 per cent in September. She said in an interview with Financial Times: “There’s good news on the month-to-month data that consumers and business are getting some relief, but inflation remains far too high and not near our price stability goal.” High Frequency Economics’ Rubeela Farooqi says, “Overall, prices remain uncomfortably high. Coupled with strength in job growth and wages, the data support the case for another aggressive rate hike in September.”

There is of course the debate whether monetary policy measures – the raising of interest rates and make credit costlier – would help in controlling inflation. It is recognized that inflation, especially rise in oil prices or that of wheat is due to the Russia-Ukraine war and the West’s economic sanctions against Russia. If the war to end, and Russian and Ukrainian resume food grains and oil supplies, the prices are likely to settle at a lower level. But US inflation rate is a fallout of the disruption cause by the Covid pandemic and the economic contraction that had happened. When the economy reopened, there was a shortage of labour and it posed problems of its own. The job growth shows promise but that needs to be sustained to stabilize the economy.

Though dollar still serves as the main international currency, the US economy as such is no more the global consumer it has been, especially for economies as different as China and Bangladesh. If consumption slows down in the US, it will impact the growth rates in far away economies, including that of larger ones like that of India which depends on the export of IT services.

The fragile interconnection between the American economy and the rest of the world has to be fine tuned to keep the global economy figures in the positive territory. That is why, the monetary police moves in the US are watched with keen interest, even apprehension, by economy players in Europe, Japan, and the rest of Asia.