Image: Chen Xia/Global Times
As predicted, the US Federal Reserve delivered another large rate hike on Wednesday, putting further pressure on global stock markets and sending the Dow Jones Industrial Average below 29,600 by the end of Friday’s trading. Compared to the index’s all-time high of more than 36,000 points in late 2021, hundreds of billions of dollars in savings from investors and retirees have evaporated.
To make matters worse, the US Federal Reserve remains stubbornly aggressive and restrictive, suggesting further rate hikes are likely before the end of this year. The Fed is now raising rates at one of the fastest rates in its modern history. Wednesday’s 75 basis point rate hike — the fifth in a row — takes the rate the Fed charges banks on loans from near zero in early 2022 to a current 3 percent minimum.
By 2023, the Fed could raise interest rates to as much as 4.5 percent, according to the Federal Reserve’s announced plan, which will undoubtedly take the wind out of the sails of the world’s largest economy, if not downright negative. The Fed forecasts the US economy to crawl 0.2 percent this year. And in 2023, the U.S. economy looks poised to struggle to escape recession.
Federal Reserve Chair Jerome Powell acknowledged that higher interest rates will inevitably mean increasing pain for American businesses and households — particularly for middle-class couples paying off a mortgage. But the Fed is determined to quell the elevated inflation seeping through the country’s economy, with the latest data showing inflation remaining stubbornly at 8.3 percent in August, with big hikes in housing, food, health care and… Training.
“We have to get inflation behind us,” Powell said on Wednesday. “I wish there was a painless way to do this. But there is none.”
In fact, the Federal Reserve’s pledge to curb inflation in order to meet the bank’s stated target of 2 percent by raising interest rates sharply in a short 12-month period is too radical, if not downright unrealistic.
By raising interest rates to 4.5 percent or even higher in the short term, the Fed will not only slow down the US economy and hurt a large number of American businesses and households, but will also send shock waves through the world’s other major economies. causing a worldwide economic earthquake. To prevent the Fed’s series of aggressive rate hikes from pulling dollar-denominated assets back to the US, other economies will also be forced to raise their interest rates, likely causing a global recession with hundreds of millions of people in their jobs.
No wonder there are growing numbers of economists who object to the Fed’s recklessness and irresponsibility in raising rates so much. For example, the depreciation of the world’s major currencies, including the euro, pound sterling, Japanese yen, Indian rupee and Chinese yuan, accelerated against the US dollar following Wednesday’s Fed rate hike.
For example, the Bank of Japan was forced to intervene in the foreign exchange market for the first time in 24 years, buying back yen last week to prop up the yen’s value because Tokyo can’t handle its troubled currency falling above 145 yen to the dollar . Meanwhile, the euro is down nearly 15 percent against the dollar this year and is trading below par. The yuan has also been hit by the fallout from Fed policy tightening, with the Chinese currency hitting a 26-month low of 7.08 yuan to the dollar last week.
And at a time when the Ukraine crisis is becoming more complicated and adding to the uncertainty that could further disrupt global energy and food supplies, the Fed’s aggressive rate hikes could further darken the global economic outlook. There is a real chance that another financial storm or systemic collapse is imminent.
In the aftermath of the 2008-09 financial crisis, the Fed resorted to a protracted monetary easing called quantitative easing (QE), giving printed dollars to American businesses and families to spend. Before 2008, the Fed’s total assets were less than $1 trillion, and by 2015 it had grown to $4.5 trillion. By the end of 2021, it rose to nearly $9 trillion.
And to keep the US economy afloat in the wake of the COVID-19 pandemic attack, both the Trump and Biden administrations have successively resorted to very generous fiscal stimulus spending plans. It was this Fed and White House speculation that triggered and fueled runaway inflation in the US.
To curb the persistent inflation that has now taken hold in many economies, central banks around the world are raising interest rates, which will stifle economic growth. Almost all global and regional research institutes have significantly lowered their growth forecasts for the world economy in 2022, many of them into 2024. Some economies are not expected to experience an acceleration in growth before 2025, and this bleak scenario worries many people in the world.
Is the US concerned about the deepening economic problems in other countries, caused proportionally by erratic US monetary and fiscal policies? Only Powell can answer that question.
When asked about international policy coordination at his press briefing on Wednesday, Powell said, “We regularly discuss what we see in terms of our own economy and international implications, but it’s difficult in a world where people think about political cooperation have very different interest rate levels.”
It seems that the Fed doesn’t care at all about other economies and their exchange rates, including many US allies. Japan will not be the only country in the world to step into the market and buy back yen. Other economies will follow and some will need to seek outside support, including the IMF.
The author is an editor at the Global Times. [email protected]