Monetary policy is a key element of America's economic power and global influence. The United States of America (USA), in addition to having the world's largest economy, also owns the US dollar, the most widely used currency in international transactions. The US dollar is the world's leading reserve currency, backed by its economy, military, petrodollar system and the associated eurodollar and large US treasury bond market.
The monetary policy of the USA is determined by the Federal Open Market Committee (FOMC). The FOMC consists of the seven-member board of the Federal Reserve System (Fed) and the presidents of 12 regional Fed banks. The FOMC aims to support economic growth, employment and price stability by adjusting the money supply and interest rates.
The monetary policy of the USA has undergone significant changes in recent years. During the 2008-2009 global financial crisis, the Fed charged interest rates near zero and used unconventional instruments such as asset purchase programs (QE). QE is when the Fed buys assets such as long-term treasury bonds and mortgage-backed securities from the market. In this way, the Fed provided liquidity to the market and lowered long-term interest rates.
In 2020, the US economy was hit hard by the Covid-19 pandemic. The Fed again lowered interest rates to near zero and expanded QE. It has also launched new emergency loan programs to provide loans to small businesses, households and local governments. The Fed also changed its inflation targeting. The Fed will now apply average inflation targeting and allow for higher inflation after inflation has remained low for an extended period of time. This means that interest rates will remain low for longer.
US monetary policy also has a significant impact on Latin America and other economies. Since the US dollar is the reserve currency, US interest rates and exchange rate movements play a decisive role on capital flows, exchange rates and financial stability of other countries. For example, when interest rates rise in the United States or the dollar appreciates, capital flows to the United States, causing an outflow of capital in other countries. This causes the exchange rates of other countries to depreciate and the value of their currencies to fall.