Can The Federal Reserve Ignore Currency Disruptions Throughout The World?

John M. Mason profile picture
John M. Mason


  • Fed Chair Jerome Powell, in recent speeches and interviews, has tried to clarify how he believes monetary policy should be set, but he has carefully avoided discussing international factors.
  • But whether it likes it or not, the Federal Reserve impacts the world through what it does and can create "unintended consequences" globally, even in the emerging market nations.
  • This problem will become a growing issue for Mr. Powell and the Federal Reserve because it is not going to go away, and will, in fact, become even more consequential.

In his speech at the Federal Reserve’s conference at Jackson Hole, Wyoming, last week, Fed Chairman Jerome Powell laid out his vision of how he believed monetary policy should be conducted.

Let it be noted that Mr. Powell said little or nothing about how international factors should be incorporated into the Fed’s decision making. In fact, since Mr. Powell has become the Fed’s Board Chair, he has tended to put aside any discussion of issues that are not domestic in nature. This is a subject he just does not seem to want to deal with.

Yet, as I have mentioned in other Seeking Alpha posts, in many respects, the Federal Reserve is de facto the central bank in the world. And I am not the only analyst in the world to think that this is the case. For example, Joachim Fels, managing director and global economic advisor at Pimco in Newport Beach, California, writes in the Financial Times that “the Fed is not only the US central bank, but also the pacemaker for the global credit cycle.”

The Federal Reserve plays an important role in the liquidity of many nations throughout the world. This became critically apparent during the Great Recession and after, as Ben Bernanke and the Federal Reserve played a crucial role in the solvency of many banking systems of many nations. Mr. Bernanke writes about this activity in his memoir of that time, “The Courage to Act.”

Even today, the Federal Reserve has almost $232 billion in reverse repurchase agreements, with “Foreign official and international accounts” as a liability on its balance sheet. Note that this line item accounted for less than $100 billion in October 2014 and rose steadily from then, until it reached the $245 billion level in February 2016. It has remained in the $230-250 billion range ever since.

This article was written by

John M. Mason profile picture
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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