– The US Federal Reserve earlier this month announced the fourth consecutive three-quarter interest rate hike to cool record levels of inflation, another aggressive move that leaves economists fearing a recession ahead.
The Fed has hawkishly pledged to raise rates to fight inflation while standing by as the US economy turns around. The move is a political calculation to take advantage of the US dollar’s dominance in the international monetary and trade system to shift domestic risks to the outside world and leave the United States unscathed.
Analysts noted that amid partisan bickering and other systemic flaws, the United States continues to introduce destructive policies that weigh on the global economy by driving up world prices, disrupting financial markets, and undermining the global economic and trade order.
US gross domestic product grew at an annual rate of 2.6 percent, compared with falls of 1.6 percent in the second quarter and 0.6 percent in the third quarter, the Bureau reported. Economic Analysis at the end of October. However, growth in consumer spending, which accounts for about 70 percent of US economic output, slowed to a rate of 1.4 percent from the 2.0 percent pace in the April quarter. -June.
Given the economic contraction for two consecutive quarters, declining consumer spending and a weakening housing market, many experts believe a recession could be a piece of cake.
“A smaller trade deficit fueled the 2.6 percent annualized increase in US GDP in the third quarter,” said Nobel laureate economist Paul Krugman, quoted by Business Insider in an article published Oct. 28. .
Growth drivers will fade as the dollar’s rise this year has made US exports less competitive, and recessions abroad could undermine demand for US goods, Krugman said.
He noted that the Fed’s rate hikes since March are “the key reason” for a potential economic downturn, adding that “higher rates have created a trade hurdle by boosting the dollar and have affected finances and the ability of Americans to buy houses as mortgages rise. costs”.
Jeremy Siegel, a professor at the Wharton School of the University of Pennsylvania, called the Fed’s current monetary policy “the third worst in the Fed’s 110-year history” at a September conference hosted by the Jacobs Levy Equity Management Center. Wharton’s.
He told CNBC in early October that the Fed is “hitting the brakes too hard” with its continued rate hikes this year. “Recession risks are extremely high,” he warned.
“Tightening monetary policy to combat inflation would add one kind of pain to another,” said US billionaire investor and hedge fund manager Ray Dalio.
The Fed’s latest huge rate hike brings its policy rate to a new target range of 3.75 to 4 percent, the highest level since January 2008. To reduce inflation, the Fed has raised interest rates six times this year for a total increase of 375 basis points and is much more likely to raise rates again in December.
However, the whirlwind has made little progress. The New York Times wrote in mid-October that “the so-called core index rose 6.6 percent, the fastest pace since 1982 and more than economists expected.”
In late October, Yahoo Finance columnist Rick Newman said that “inflation’s knock-on effect on living standards has pushed consumer confidence near record lows.”
On the 10th anniversary of the Fed’s quantitative easing applied during the 2008 global financial crisis, J. Bradford Delong, a professor of economics at the University of California, Berkeley, noted in an article titled “The Unhistorical Federal Reserve” that the Fed has internalized none of the lessons that past economic developments have taught.
“The Fed’s process of moving from a realistic view of the economy to appropriate monetary policy does not appear to be working entirely well,” he wrote.
In fact, once the COVID-19 pandemic rocked the US economy, the Fed again resorted to aggressive easing. “Last year’s shockingly irresponsible monetary policy led to most of today’s inflation,” US policy analyst Michael Busler wrote in mid-October.
In his book “Secrets of the Temple: How the Federal Reserve Runs the Country,” American journalist William Greider noted that the central bank has regularly caved in to inflation, “failing to resist short-term political pressures for economic growth.”
Added to the aggressive monetary policy of the Fed is the expansive fiscal policy of legislators in Congress who have served the short-term interest of US campaign policy to contain runaway prices.
“There is a possibility that macroeconomic stimulus on a scale closer to World War II levels than normal recessionary levels will trigger inflationary pressures of a kind we haven’t seen in a generation,” warned the former US Treasury secretary. US, Lawrence Summers, on inflationary risks in the past. February 2021.
But such risks have been downplayed by Washington and the Fed. It wasn’t until December 2021 that Fed Chairman Jerome Powell said it was no longer his view that “price increases are not particularly large or persistent.”
In the late 1970s, then-Chairman of the US Federal Reserve, Paul Volcker, raised the Federal Reserve’s interest rate significantly to rein in inflation, bitter medicine that led to not one but two recessions. in the country before prices finally stabilized. The world beyond the United States suffered the most when the interest rate shock triggered a debt crisis in Latin America and led to a global recession.
Now, many pundits think of Powell as “Volcker’s second-coming wannabe” and worry about another Volcker Shock given the Fed’s current aggressive moves, which, just as then, will come at a high cost in places outside the United States. Joined.
The rest of the world has already felt the pain. In October, inflation in the eurozone is expected to reach a new record of 10.7 percent. Japan‘s consumer price index rose 3 percent in September, marking the biggest gain in 31 years. Average inflation in Africa is projected to accelerate to 13.5 percent in 2022.
On October 11, the International Monetary Fund forecast that global economic growth will slow from 3.2% this year to 2.7% in 2023, citing a long list of threats, including chronic inflationary pressures, energy prices and war-fuelled food and punitive interest rates. , many of which were induced by poisonous US policies.
Borrowers around the world are feeling the pinch as the Fed’s dramatic rate hikes have boosted the value of the dollar and fueled higher borrowing costs. In an article titled “Strong US Dollar Is Wreaking Havoc in Nearly Every Country,” Fortune magazine noted that it is “rising pressure” on other major central banks to raise interest rates. However, they have “limited” ability to “influence the strength of the dollar.”
European Central Bank President Christine Lagarde recently said that “a mild recession” is possible in the eurozone in late 2022 and early 2023. The United Nations Conference on Trade and Development noted that around 90 developing countries have seen their currencies weaken against the dollar this year. , more than a third of them in more than 10 percent. The International Monetary Fund said that about 60 percent of low-income developing countries are already at high risk of debt distress.
The rate hikes in the United States are inhumanely affecting the Sri Lankan economy, said Samitha Hettige, an expert in strategic studies. “We have seen massive capital inflows to the US and larger outflows from the developing world. If you look at the Sri Lankan stock market, you can see this.”
The All Share Price Index, one of the main stock indexes on the Colombo Stock Exchange in Sri Lanka, fell from over 13,000 points in mid-January to around 8,000 points in mid-November.
Meanwhile, as the United States turned to protectionism and deglobalization to boost its domestic industries, it raised trade costs and worsened international relations.
CNBC said in early November that the EU has “serious concerns” about the US Inflation Cut Act, a sweeping tax, health and climate bill passed by US lawmakers in August. , as it violates international trade rules. The Financial Times noted in late October the growing threat of a trade war between the EU and the US over the act.
To maintain its hegemony, the United States has been busy fanning the flames of instability amid geopolitical tensions, affecting investment intentions and paralyzing economic activities.
Cliff Kupchan, chairman of the Eurasia Group, wrote in late October that the escalation of the Ukraine crisis “will fuel ongoing deglobalization and decoupling,” causing supply and commodity crises and burning companies with import risks. and price crises.
“America’s problems are problems of bad policy,” wrote former Fed Chairman Alan Greenspan and The Economist writer Adrian Wooldridge in the book “Capitalism in America: A History.”
“US policy has taken a populist turn,” they said. Final product
(Reporters Xu Chi in Geneva and Che Hongliang and Rahindra in Colombo also contributed to the story.)