In a bid to fight the rampant inflation in the United States, the Federal Reserve raised interest rates by 75 basis points on Wednesday, the biggest increase since 1994.
The move came after the consumer price index rose 8.6 percent in the US last month, the largest monthly hike since December 1981, and one that indicated the inflation pressure in the US had not been eased by the Fed's 25-basis-point interest rate hike in March or its 50-basis-point rise in May, when it hinted that interest rates might be increased 50 basis points in June, July and September.
Increasing the planned hike from 50 basis points to 75 is due to the fact that the inflation is more serious than expected.
"Our objective really is to bring inflation down to 2 percent while the labor market remains strong…What's becoming more clear is that many factors that we don't control are going to play a very significant role in deciding whether that's possible or not", Fed Chairman Jerome Powell said at a news conference after the end of the Fed's two-day policy meeting.
He cited the conflict in Ukraine and global supply concerns as prime factors driving up inflation.
But while these may be factors beyond the Fed's control, they are not beyond the control of the US administration. It is the US administration that is ensuring that the Russia-Ukraine conflict drags on, having provoked it in the first place. And it is the US that has been disrupting global supply chains with its attempts to squeeze out China.
As such, rather than acting responsibly as the central bank and the world's de facto monetary policymaker, a role it enjoys as the world's largest economy, the US will continue to stir the water while the pot boils over.
Every economic move that the US makes affects other economies. As the World Bank has pointed out, since the US dollar is the most widely used currency in global trade and financial transactions, changes in US monetary policy and investor sentiment play a major role in driving global financing conditions.
With Powell saying that the Fed envisions steady rate increases through the rest of this year, perhaps including additional 75-basis-point hikes, policymakers in developing countries will have to be alert and prepared for the spillover effects.
Policymakers in China have indicated that they will adopt prudent macro-management policy to avoid excessive short-term fluctuations in the financial market and prevent fears of the yuan depreciating rapidly. They should remain on their guard against any damaging spillover from the US' self-created troubles.