Donald Trump would have no doubts, but fortunately he's not in charge at the Fed .... it's the old "domestic - v - global" thing.

ref :- "Ructions in emerging markets and Europe put Fed under pressure" , The Financial Times, markets and Investing

If anyone had been in any doubt about what an "America First" policy really meant, Mr Trump's actions across a wide range of spheres should have clarified things pretty effectively. Whether it's Trade and Economics, Diplomacy (for want of a better term), Military Cooperation, Climate Change, well ..... you name it, the interests of the USA must come first despite any collateral damage to erstwhile friends and adversaries alike.

Some of those friends might be left wondering whether the real question should be : "Judging from the President's actions, how can you tell whether you're an ally of the Trump-era USA, or its enemy ?"

Other people might say that the President's interpretation of the "America First" agenda that he was elected on is fair enough. And guess what ? In amongst all the narrow-minded, jingoistic nationalism there are just enough nuggets of truth, if you suspend any contemplation of the bigger picture, to lend the claim that Mr Trump is only trying to level the playing field at least a modicum of credibility. China has behaved outside WTO rules with naked self-interest in a number of areas (most obviously Intellectual Property) ...... there are trade issues where the USA's complaints seem legitimate (e.g. the automotive industry) ...... and frankly, it's only right that the President should insist that all members meet their obligations to NATO instead of assuming that the USA will bail them out should the time come.

There are existing methods to deal with such problems, though. The trouble with the "bull-in-a-china shop" approach is that not only does it often hit entirely the wrong targets, it threatens to destroy the "world order" that the US took the lead in creating, and not only in matters of trade. It alienates friends and may ultimately leave the US without willing partners when it needs them. It's certainly possible that the nativist approach may one day turn round and bite the USA in the backside .... which would no doubt have liberals the world over queuing up to ask US citizens : "How well do you think that the America First policy has served you now ?"

Oh well, that's another debate for another time ..... and probably for another column. Weren't we supposed to be talking about the Fed ?

The connection, not too tenuous we hope, is that in theory the Federal Reserve also has a domestic mandate ..... or rather, dual mandate. The Fed is tasked with implementing monetary policy in order to "foster economic conditions that achieve both stable prices and maximum sustainable employment". No mention is made of putting off changes in monetary policy to prevent stormy ramifications elsewhere. For that matter, no mention is made of tailoring decisions to support specific markets and asset prices generally  --  that's definitely NOT part of their mandate  --  but nevertheless, the Fed has increasingly taken these things into account.

One or two arch hawks, desperate to hurry the pace of rate normalization, have criticised the Fed for going outside their mandate, but most of us are grateful that they have ..... and can't imagine a responsible central bank, particularly one overseeing the world's most powerful economy, acting without considering the global ramifications of their decisions.

There's a very simple reason for this ..... economies and markets are global phenomenons, and all are intrinsically interconnected. Contagion easily spreads from one area to the next, and for that reason alone the Fed is rightly wary of making any decision that might provoke any kind of market meltdown . Although we're sure all Fed policymakers are thoroughly decent types, it's not a matter of saintly altruism  --  suspending moves that the US economy might require for the sake of helping others  --  it's actually a matter of thoroughly acceptable self-interest. The US economy would suffer greatly from the spillover effects of carnage elsewhere, and even subscribers to the "America First" principle should realise that the Fed has to avoid any unnecessary steps that might provoke it.

Next Wednesday, the Fed will decide whether to raise rates for the second time in 2018 ..... and the odds are very heavily in favour of them doing so. That's not unreasonable ..... strong economic data makes any other decision almost impossible. The bigger question perhaps is whether we should expect another two this year, or just the one (as per the Fed's own most recent predictions) . The odds have swung repeatedly between the two outcomes recently, with global issues and a hint of a more tolerant attitude to any overshoot in inflation from Fed Chair Jay Powell suggesting a gentler upward path, and consistently robust growth arguing in the other direction.

With US monetary policy in mind, the FT piece focuses on two global issues and how they are affected by not only the path of US interest rates but by the Fed's decisions.

Most will have read about the particular problems faced by Turkey and Argentina, but the surging dollar and rising US rates are a very big problem for all emerging markets laden with dollar-denominated debt. Donald Trump's economic stimulus has introduced $1.5bn in tax cuts and $300bn in federal spending ..... with the obvious result that the US budget deficit will be greatly increased and in turn that will mean a similar increase in the issuance of US Treasuries. With all that upward pressure on yields, now is definitely not the time for the Fed to releasing more Treasuries back to the market in an attempt to reduce its balance sheet as it is currently doing ..... or so the argument goes.

Indian central bank governor Urgit Patel has urged the Fed to slow its balance sheet reduction : "If it does not, Treasuries will absorb such a large share of dollar liquidity that a crisis in the rest of the (global) dollar bond markets is inevitable".

Last week's Italian crisis will also have reminded those that needed it about how interconnected the world and its markets are. The flight-to-quality saw a rush for US Treasuries that saw Treasury yields fall sharply just when they had been expected by some to break higher into new ground. The panic conditions may have passed, but the nature of the coalition government and its wild fiscal plans mean that another crisis down the line is very much on the cards, The Fed will have to keep an eye on Rome too.

Given the current strength of the US economy and Mr Trump's own deficit-inflating fiscal initiatives, some Fed tightening is inevitable. But with an eye on that bigger picture, the suggestion from Mr Patel and others is that they exercise restraint. We can be confident that at the very least they will surely consider matters outside the Us' own borders. They know just how a sudden stop in the global recovery could backfire on the US, even if it's not a very "Trumpian" way of looking at things.