Fed official warns UK tax cuts increase risk of global recession

The UK government’s new fiscal plan has increased economic uncertainty and raised the likelihood of a global recession, a senior Federal Reserve official has warned after sterling hit a record low.

Raphael Bostic, president of the Atlanta branch of the Federal Reserve, said while the pound wobbled as traders digested British Chancellor Kwasi Kwarting’s £45 billion tax cut package “the economy will be”.

When asked if the plan and the resulting volatility would increase the likelihood of the global economy sliding into recession, Bostic said, “It’s not helping.”

“A fundamental tenet of economics is that more uncertainty leads to less engagement from consumers and businesses,” he said. “The key question will be what this ultimately means for the weakening of the European economy, which is an important consideration for how the US economy will perform.”

Bostic’s comments followed a warning from Susan Collins, president of the Fed’s Boston branch, who said an external shock could plunge the US economy into recession.

At an event on Monday, Collins, whose term began in July, highlighted the challenges facing the Fed as it faces price pressures that have proved much tougher than expected while impacting a wide range of sectors spreads.

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“A significant economic or geopolitical event could push our economy into recession if policies continue to tighten,” said Collins, who is this year a voting member of the Federal Open Market Committee and the first black woman to lead one of the bank’s branches .

She added: “Furthermore, calibrating policy in these circumstances is complicated by the fact that some effects of monetary policy are lagged.”

Collins and Bostic are among the first senior Fed officials to make public comments since the central bank delivered its third straight 0.75 percentage point rate hike last week and announced more large rate hikes.

Most officials expect the federal funds rate to rise to 4.4 percent by the end of the year before peaking at 4.6 percent in 2023. It fluctuates between 3 percent and 3.25 percent.

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Also on Monday, Cleveland Fed President Loretta Mester spoke about the global impact of the Fed’s aggressive monetary tightening campaign, which has resulted in a significant appreciation of the dollar against currencies around the world.

“We’re going to set monetary policy that’s appropriate for the US economy, but we’re not putting it in a vacuum because we think we’re an independent island and not connected to the rest of the world,” she said an event of the Massachusetts Institute of Technology.

With inflation at multi-decade highs, Mester said “this is not the time” to worry about the risks of overdoing monetary policy, and she outlined the very high bar the Fed needs to use to measure its plans to slow inflation, take back economy.

“Wishful thinking cannot replace compelling evidence. So before I conclude that inflation has peaked, I need to see several months of month-to-month declines in readings,” she said.

Collins, meanwhile, said it was “quite likely that inflation has peaked and may have already peaked”.

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However, she noted that the Fed’s tools had some limitations, particularly in terms of easing supply-side constraints and labor shortages that have helped push inflation to its highest level in about four decades.

Like other officials, Collins believes the job losses associated with this tightening cycle could be less severe than in the past.

As employers have struggled to find workers – resulting in one of the tightest job markets in decades – most officials see the unemployment rate rising from 3.7 percent to just 4.4 percent in the coming years.

“There’s a really good chance that the job losses will be less than in other situations, and I’m betting on that,” Bostic said in an interview with CBS on Sunday.

“We’re going to do everything we can at the Federal Reserve to avoid a deep, deep pain, and I think there are a few scenarios where that’s likely to happen,” he said.