Economic events in other countries, such as the financial crises in Eastern Europe and Asia during the 1990s, have forced the Federal Reserve to take a more global view. This is particularly relevant in how it sets interest rate policies for the United States. When the economies of Asia suffered severe economic crises, the value of their domestic currencies fell in international markets. This allowed U.S. companies to buy commodities from these countries at much lower prices in terms of U.S. dollars. These falling commodity prices apparently helped reduce any threat of inflation in the United States during this period. Some observers argue that is why we saw robust economic growth without inflation as well as a surging stock market. Policymakers at the Fed realized that they could continue to increase the money supply at a historically fast pace without immediate fear of inflation.

At the start of the 2008 financial crisis, the U.S. stock market crashed. The Fed announced several interest rate cuts and flooded the banking system with increased liquidity. Fed policymakers also immediately consulted with major foreign central banks and began a coordinated set of policies to prevent a collapse of the global financial system. Clearly, the Fed is taking international developments into account more than ever before when deciding what policy to make for the United States.

In what ways can the spread of the U.S. financial crisis to the rest of the world affect the U.S. economy?