The Federal Reserve has launched an aggressive campaign to raise interest rates in an attempt to curb the fastest inflation in decades. The central bank sees it as a necessary effort to restore price stability in the United States.
But what the Federal Reserve is doing at home has implications around the world, and its actions increase the risk of a global recession, causing economic and financial pain in many developing countries. It’s causing
Other central banks in developed countries, from Australia to the eurozone, are also rapidly raising interest rates to fight inflation. And as the Fed’s interest rate hikes draw money into the US and the dollar appreciates, emerging markets are forced to raise their borrowing costs to keep their currencies as stable as possible.
Overall, this is a global pressure on a more expensive currency unlike anything we’ve seen so far in the 21st century, and one that is likely to have serious consequences.
Higher interest rates slow inflation by cooling consumer demand and allowing supply to catch up, paving the way for more moderate price increases. slowing growth, driving unemployment and spilling over into financial markets in sometimes destructive ways.
It’s unclear how much pain today’s movement will ultimately cause. With so many countries raising rates so quickly and doing so at the same time, it’s hard to tell how much the slowdown will be after the rate hikes take full effect. It takes months or years for monetary policy to become fully operational.
But many economists and several international organizations warn that there are significant dangers or that we are overdoing it. He warned that damage could be particularly severe in poorer countries.Developing countries are already facing a cost-of-living crisis due to soaring food and fuel prices, and now imports from the United States are steadily becoming more expensive as the dollar rises.
The Federal Reserve’s move has fueled concerns about market volatility and financial stability. Rising interest rates are making the U.S. dollar more valuable, making it harder for emerging market borrowers to service their dollar-denominated debt.
This is a recipe for global turmoil and recession. Despite this, the Fed is poised to continue raising rates. This is because, like central banks around the world, the Federal Reserve is in charge of domestic economic goals. It is supposed to keep inflation steady and slow while promoting maximum employment.While sometimes calling “”central bankers of the worldWith the dollar at the center of it all, the Federal Reserve faces America head-on in its day-to-day business.
San Francisco Federal Reserve Bank President Mary C. Daley said in an interview, “Of course, as a human being, I care about the pain other countries are going through, but as a policy maker, I have only one tool.” said. Tuesday. “Even for the US goals of full employment and price stability, this is a blunt instrument.”
Inflation FAQ
What is inflation? Inflation is the loss of purchasing power over time. So your dollar won’t go as well tomorrow as it did today. This is usually expressed as annual fluctuations in the prices of commodities and services such as food, furniture, clothing, transportation, and toys.
The threats facing the global economy, including the role of the Fed, are expected to take center stage next week when the International Monetary Fund (IMF) and World Bank meet in Washington next week.
In a speech at Georgetown University on Thursday, IMF Managing Director Kristalina Georieva gave a tough assessment of the tightrope the global economy and central banks are walking.
“If there is not enough tightening, inflation will be unanchored and entrenched,” Georgieva said. It will be a big blow to the “On the other hand, excessive and rapid monetary policy tightening, and doing so simultaneously across the country, could push many economies into a prolonged recession.”
Noting that inflation remains high and widespread, he added, “the central bank must continue to respond.”
The World Bank warned last month that simultaneous rate hikes around the world could trigger a global recession next year and financial crises in developing countries. He urged central banks in developed countries to beware of cross-border “spillovers”.
“To achieve low inflation, currency stability and faster growth, policymakers can shift their focus from reducing consumption to increasing production,” said World Bank President David Malpass. .
This week, the United Nations Conference on Trade and Development said moves by the Fed and other central banks risk triggering a global recession. “Interest rate hikes by developed countries are hitting the most vulnerable countries hardest.” trade development report Said.
So far, major central banks have shown little willingness to halt their anti-inflation campaigns. The Fed, which has raised interest rates five times this year, sent a signal The plan is to raise the cost of borrowing even further. Most officials expect at least another 1.25% rate hike this year, with the policy rate in the 4.25-4.5% range from the current 3-3.25%.
Even economies facing a marked slowdown are raising their borrowing costs. The European Central Bank raised interest rates by three-quarters of a percentage point last month, even as the continent approaches a dark winter of slowing economic growth and sharply lower energy costs.
Monetary policymakers around the world feel an urgency to keep inflation in check after it has been running at an alarmingly high rate for a year and a half. If it continues, it can permeate consumer and business behavior in ways that make it an insidious part of everyday life. For example, workers may negotiate regular adjustments to their cost of living, and businesses may raise prices frequently to pass on higher costs.
To prevent inflationary psychology from taking hold, central banks believe inflation needs to be contained as soon as possible. In other words, they need to raise their rates significantly and quickly.
Even if the goal is clear, the path to achieving it can be traumatic, especially for poor countries.
Inflation has exceeded 5% in recent months in 88% of low-income countries, 91% of lower-middle-income countries, and 93% of upper-middle-income countries. According to the World BankFood costs in particular drive millions into extreme poverty and exacerbate hunger and malnutrition. While the surge in the dollar makes a range of imports destined for emerging markets more expensive, the potential for financial turmoil is likely to worsen.
“Low-income developing countries in particular face serious risks from food insecurity and debt crises,” said World Trade Organization (WTO) Director-General Ngozi Okonjo-Iweala at a press conference this week.
Understanding Inflation and How It Affects You
In Africa, officials have called on the IMF and G20 countries to provide more emergency aid and debt relief amid inflation and rising interest rates.
“This unprecedented shock will further destabilize the weakest economies, reduce the impact of broader inflation, and reduce the need for liquidity to support the most vulnerable households and segments of society, especially young people and women. I will make it even faster.” African Union President Macky Sall told leaders at the United Nations General Assembly in September.
Indeed, the central banks of large developed countries like the United States recognize that their policies are overwhelming others. And while they focus on domestic goals, a severe weakening abroad could pave the way for less aggressive policies as it affects their own economic prospects.
Declining demand from abroad could ease pressure on supply chains and drive prices down. If central banks decide that such a chain reaction is likely to weigh on their business activity and inflation, they may have more room to delay policy changes.
“The global tightening cycle is something the Fed will have to take into account,” said Megan Green, global chief economist at consulting firm Kroll. I’m interested in what’s happening in other parts of the world.”
In fact, the Bank of Australia surprised the market this week by raising interest rates by a quarter of a percentage point instead of the expected half a percentage point. When making the decision, it referred to a global slowdown.
“One source of uncertainty is the recent deterioration in the outlook for the global economy,” said Reserve Bank Governor Philip Lowe. his statement.
However, many global economic officials, including the Federal Reserve, are still focusing on very high inflation. Investors expect another big rate hike at the November 1-2 meeting.
Fed Governor Lisa D. Cook said in a question-and-answer session on Thursday that the Fed is “very attentive” to international spillovers to both emerging market and developed economies. Our mission is domestic, which is why we are very focused on how inflation develops in this country.”
Raghuram Rajan, former governor of India’s central bank and now an economist at the University of Chicago, has called for the Fed to consider foreign conditions in the past when making policy decisions. He still believes that measures such as bond purchases should be pursued given the global spillover effect.
But amid high inflation, central banks need to pay attention to their mandate of achieving price stability, he said.
“The fundamental problem is that the world of monetary policy is on the Fed’s footsteps,” Rajan said, adding that “this is a problem with no easy solutions.”