Scared of US interest rates
WASHINGTON: Stubbornly high inflation is raising fears on Wall Street that the Federal Reserve will react by raising interest rates until the United States slips into recession, dragging with it a weakening global economy.
As analysts say the US economy grew in the third quarter, signs of trouble are mounting, both at home and abroad. Rising mortgage rates cool US housing market; energy shortages are hurting production in German factories; and recurring coronavirus lockdowns are hampering Chinese businesses.
The Fed and other central banks are tightening credit to fight historically high inflation even as three of the world’s main economic engines – the United States, Europe and China – are collapsing. As the United States and other governments also cut spending on pandemic relief measures, the global economy is receiving less support from policymakers than at almost any time in 50 years, said the World Bank in a new report that warned of rising risks of a global recession.
Central banks, meanwhile, are engaged in the most aggressive rate hike campaign since the late 1990s, according to Citigroup. This month, central banks in Europe, Canada, Australia and Chile raised rates, and the Fed is expected to do so for the fifth time since March when it meets next week.
Some economists worry that the world’s central bankers are misreading the global economy in their rush to raise rates, just as they did – in the opposite direction – last year when they insisted that the inflation would be temporary and resisted to act. The cumulative effects of credit crunches in several countries at the same time could strangle global growth.
Fed rate hikes push the dollar higher against other major currencies, making imported goods cheaper for Americans, while making it harder for people and businesses in other countries to buy goods produced outside their borders.
Major oil importers like Tunisia have been particularly hard hit, since the price of crude is in dollars. The strength of the greenback is also hurting developing countries that have large debts in dollars. As their local currencies lose value against the dollar, more Turkish liras or Argentine pesos are needed to pay off the debt.
Despite raising its policy rate by two and a half points since March, the Fed has not been able to slow the economy enough to ease the pressure on prices. On Thursday, initial jobless claims fell for the fifth week in a row, the latest sign that the labor market remains too hot for the central bank’s comfort.
While strong hiring is good news for American workers, many economists have said unemployment will have to rise before inflation cools.
The Labor Department’s report this week that consumer prices in August were 8.3% higher than a year ago – little change from July’s 8.5% – disappointed investors. investors.
Some analysts expect the Fed to continue to hike beyond the 3.8% level that policymakers suggested in June to finish their anti-inflation job. On Friday, Deutsche Bank economists said the Fed’s benchmark lending rate could reach 5% next year, about double the current level.
Wall Street firms such as Oxford Economics said this week that the Fed would apply the brakes hard enough to contain prices, even if it sent the United States into a brief downturn.
“Higher inflation for longer, more aggressive monetary policy tightening by the Fed, and the negative fallout from a weakening global backdrop will combine to push the U.S. economy into a mild recession,” the statement said. company in a note to customers.
Since 1981, US and global growth have largely moved in tandem, according to research by Citigroup. In each of the four global recessions since 1980, the United States — which accounts for about a quarter of global gross domestic product, or GDP — has slowed either just before the global economy fell into a slump or at the same time.
The IMF said this summer that the global economy was at risk of sliding into recession due to aftershocks from the war in Ukraine, the pandemic and inflation. The IMF alarm followed a warning from the World Bank about the risk of global “stagflation”, a toxic combination of persistently high prices and anemic growth.
The big concern is Europe, which is struggling to adjust to the loss of Russian natural gas supplies. Moscow reacted to European sanctions after the invasion of Ukraine by cutting natural gas shipments to Europe by around 75%, according to Barclays.
As energy prices soared, consumers and businesses across the continent felt the pinch. After years of keeping borrowing costs below zero, the European Central Bank has hiked rates twice since July to rein in inflation that tops 9% – and plans further such measures despite the weakening economy.