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Informing the public about the Federal Reserve
How does the globalization of financial markets affect the ability of the Federal Reserve to promote macroeconomic and financial stability?
As financial markets around the world have become more tightly integrated, financial conditions within the United States have become increasingly subject to influences from beyond our borders. To make effective policy, the Federal Reserve must have as full an understanding as possible of the factors determining financial conditions, economic activity, and inflation in the U.S. economy, whether those influences originate at home or abroad. Consequently, one direct effect of globalization on Federal Reserve operations has been to increase the time and attention devoted to following and understanding developments in other economies, the world trading system, and global capital markets.
However, globalization has not materially affected the ability of the Federal Reserve to influence financial conditions in the United States. Through its ability to influence interest rates, the Fed retains the capacity to affect the cost of credit to U.S. households and firms. Moreover, the breadth and transparency of U.S. financial markets reduce their vulnerability to disruptions in foreign markets. Finally, globalization does not appear to have led to significant changes in the factors that determine U.S. inflation. That said, the Federal Reserve continues to place a high priority on understanding the effects of globalization on the U.S. economy in general and on the conduct and transmission of U.S. monetary policy in particular.
