The reckless rise in US interest rates caused a global economic earthquake

Illustration: Chen Chia/Global Times

As expected, the US Federal Reserve raised interest rates again on Wednesday, adding further pressure on global stock markets and pushing the Dow Jones Industrial Average below 29,600 points at the close of trading on Friday. Compared to the index’s all-time high of more than 36,000 points in late 2021, hundreds of billions of dollars have evaporated from the savings of investors and retirees.

To make matters worse, the US central bank remains aggressive and hawkish, indicating that further rate hikes are possible before the end of this year. The Federal Reserve is now raising interest rates in one of the fastest steps in its recent history. Wednesday’s 75 basis point rate hike – the fifth in a row – raises the rate the Fed is charging banks to borrow from nearly zero at the start of 2022 to the current minimum of 3 per cent.

By 2023, the Federal Reserve could raise interest rates to 4.5 percent, according to the announced plan of the US central bank, which will undoubtedly take the winds of the world’s largest economy, if not send it into negative growth. The Fed expects the US economy to crawl 0.2% this year. And in 2023, it seems that the US economy can barely survive a recession.

US Federal Reserve Chairman Jerome Powell has acknowledged that higher interest rates inevitably means more pain for American companies and families – the middle-class couples who pay off mortgages in particular. But the Federal Reserve is determined to stem the high inflation seeping through the country’s economy, with the latest data showing that inflation remained stubbornly high at 8.3 percent in August, with soaring prices for shelter, food, health care and education.

“We have to put inflation behind us,” Powell said on Wednesday. “I wish there was a painless way to do it. But there isn’t.”

As a matter of fact, the Fed’s commitment to reduce inflation to reach the bank’s 2 percent target by raising interest rates significantly in a short period of 12 months is very radical, if not unrealistic.

By increasing the rate to 4.5 percent or even higher within a short period, the Fed will not only dampen the US economy and harm a large number of American businesses and households, but also send shock waves through the other major economies of the world, causing a global economic earthquake. To prevent dollar-denominated assets from returning to the US through a series of sharp interest rate increases by the Federal Reserve, other economies will be forced to raise interest rates as well, potentially causing a global recession, with hundreds of millions of people lost. their jobs.

No wonder a growing number of economists are resisting the Fed’s recklessness and irresponsibility in raising interest rates sharply. For example, the depreciation of the world’s major currencies, including the euro, sterling, Japanese yen, Indian rupee and Chinese yuan, accelerated against the US dollar after the Federal Reserve raised interest rates on Wednesday.

For example, the Bank of Japan, for the first time in 24 years, was forced to intervene in the foreign exchange market by buying back the yen last week to prop up the value of the yen, because Tokyo cannot handle its volatile currency from dropping over 145 yen to the dollar. . Meanwhile, the euro has fallen nearly 15 percent this year against the dollar and is trading below par. The yuan was also hit by the fallout from the Fed’s tightening policy, with the Chinese currency hitting a 26-month low of 7.08 yuan per dollar last week.

As Ukraine’s crisis deepens, adding to the uncertainty that could further global disruption to energy and food supplies, the Fed’s aggressive rate increases could further cloud the global economic outlook. There is a real chance that another financial storm or system-wide collapse could descend on the pipeline.

Faced with the fallout from the 2008-2009 financial crisis, the Fed resorted to a prolonged round of monetary easing, called quantitative easing (QE), by paying US businesses and families printed dollars to spend. Before 2008, the size of the Federal Reserve’s balance sheet was less than a trillion dollars, and by 2015 it had risen to 4.5 trillion dollars. At the end of 2021, it had jumped to nearly $9 trillion.

To keep the US economy afloat in the wake of the onslaught of the COVID-19 pandemic, the Trump and Biden administrations have resorted to very generous fiscal stimulus spending plans, one after the other. It was these exaggerations on the part of the Federal Reserve and the White House that caused and fueled hyperinflation in the United States.

To curb persistent inflation, now entrenched in many economies, central banks around the world are raising interest rates, which will stifle economic growth. Almost all global and regional research institutions have drastically lowered their growth forecasts for the global economy in 2022, with many extending them to 2024. Some economies are unlikely to see a rebound in growth until 2025, and this bleak scenario upsets many people in the world.

Is the US concerned about the worsening economic problems in other countries caused by the erratic US monetary and fiscal policies? Only Powell can answer this question.

When asked about international policy coordination at his press conference on Wednesday, Powell said: “We regularly discuss what we see in terms of our economy and the international ramifications, but it’s hard to talk about political cooperation in a world where people have very different levels of interest rates.”

The Fed doesn’t seem to care about other economies and their exchange rates at all, including many of the United States’ allies. Japan will not be the only country in the world to intervene in the market and buy back the yen. More economies will follow, and some will have to seek external support, including from the International Monetary Fund.

The author is editor of the Global Times. [email protected]

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