The Cable

The Fed Is Worried About Greece and China Even if the White House Isn’t

The Fed is keeping interest rates low to stem off fallout from two crises the White House says won't impact the American economy.

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For months, U.S. President Barack Obama and Treasury Secretary Jack Lew have insisted the American economy, which has been growing at a modest clip, is insulated from the crises in Greece, where Athens is close to bankruptcy, and China, a country whose stock market is in free fall.

But Wednesday afternoon, their efforts to assuage the American public were undermined by their own central bank. Minutes from the Federal Reserve’s June 16-17 policy-setting committee meeting indicate it won’t raise interest rates because of fears of contagion from China and Greece.

In the past, Fed officials have indicated they were strongly considering raising interest rates on U.S. loans because they believe the American economy is strong enough for businesses and consumers to pay more to borrow. Keeping them low allows Americans to borrow on the cheap, something that stimulates economic activity. Rates haven’t been raised since 2006, a year before the housing bubble burst, triggering the Great Recession.

Hours before the Fed minutes were made public, Lew insisted the United States wouldn’t be hit by any fallout from China’s collapsing stock market even though China is the second largest American trade partner, accounting for 15 percent of U.S. imports and exports this year.

“China’s markets are still pretty much separated from world markets,” Lew said at the Brookings Institute on Wednesday morning. “They’re obviously moving towards being more integrated, but right now they’re not so …I don’t think you’re going to see the direct linkage there.”

For years, the United States has urged China to open its economy to American investment. It also wants Beijing to transition to a consumer-driven economy as opposed one in which consumers invest in the stock market in the hopes of future returns.

But as the implosion of an investment bubble — filled by Chinese investors who borrowed to invest in its historic bull market — lays bare, the U.S. calls have done little to change the way China does business. After trading ended Wednesday, China’s stocks are down 32 percent for the year, and officials in Beijing seem powerless to stop them from sinking lower.

Obama, speaking at a June 30 press conference, had also tried to tamp down fears of Greek spillover into the U.S. economy. “It is an issue primarily of concern to Europe,” the president said, referring to the country’s debt crisis.

Less than two weeks later, Lew is taking a far more cautious line. On Wednesday, he made one last plea for a deal, calling on Europe to give Athens some debt relief in exchange for spending cuts and pension reforms. It was his most strident call to compromise to date, and hinted at contagion fears.

“There’s a lot of unknowns if this goes to a place that completely melts down in Greece. I think that is a risk that the Europeans and global economy don’t need. I think geopolitically it would be a mistake,” Lew said.

As U.S. officials and Wall Street watch with growing weariness, Greek Prime Minister Alexis Tsipras’s standoff with European officials over his country’s debt is nearing its end. After defaulting on a $1.7 billion IMF loan last week, he’s supposed to deliver a set of economic reforms Thursday that would, if acceptable to European officials, pave the way for a third bailout. If he and Europe can’t agree to a deal, Athens could be forced out of the euro, devastating his country’s economy, threatening growth in Europe, and causing unknown ripples across world economies.

Obama and Lew have also made multiple phone calls pushing for a deal to Tsipras, German Chancellor Angela Merkel, and other European leaders. At least so far, those calls have gone unheeded, with Merkel in particular showing no signs of relenting on her demands that Greece agree to hard-hitting new austerity measures before she would even consider a bailout.

According to Ian Lesser, director of the German Marshall Fund’s Transatlantic Center in Brussels, the United States missed its opportunity to have a bigger role in closing the Greek crisis by not getting involved earlier. Now, the U.S. economy has to deal with the unknown risks produced by a nation possibly leaving the eurozone.

“A failing Europe, a Europe that’s not able to take an active position on world events, that doesn’t help the United States,” Lesser told FP in a recent interview.

Photo Credit: Alex Wong/Getty Images

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