The Federal Reserve and other central banks risk pushing the global economy into recession followed by prolonged stagnation if they keep raising interest rates, a United Nations agency said on Monday.
The warning comes amid growing unease over the haste with which the Fed and its counterparts are raising borrowing costs to contain rising inflation. India’s central bank said on Friday that the global economy was facing a third major shock after the Covid-19 pandemic and Russia’s invasion of Ukraine, in the form of aggressive rate hikes by central banks of rich countries.
In its annual report on the world economic outlook, the United Nations Conference on Trade and Development said the Fed risks causing significant damage to developing countries if it persists with rapid rate increases. The agency estimated that a one percentage point increase in the Fed’s key interest rate reduces economic output in other rich countries by 0.5% and economic output in poor countries by 0.8% over the three following years.
UNCTAD estimated that the Fed’s rate hikes so far this year would cut economic output in poor countries by $360 billion over three years, and policy tightening would do additional damage.
UNCTAD Secretary-General Rebeca Grynspan said the current rate increases “harm the most vulnerable, especially in developing countries.”
Photo:
David Zorrakino/Zuma Press
“There is still time to pull back from the brink of recession,” said UNCTAD Secretary-General Rebeca Grynspan. “We have the tools to calm inflation and support all vulnerable groups. But the current course of action is hurting the most vulnerable, especially in developing countries, and risks plunging the world into a global recession.”
In September, Fed officials raised their benchmark federal funds rate by 0.75 percentage points, the fifth straight increase this year, to combat US inflation that is nearing a four-year high decades The move brought the rate to a range between 3% and 3.25%, from near zero earlier this year. Almost all officials projected a rate increase between 4% and 4.5% by the end of the year.
At a later news conference, Fed Chairman Jerome Powell said the central bank is mindful of the impact its policies have on the rest of the world, but will continue to raise interest rates to control the inflation
The Federal Reserve approved a third consecutive hike of 0.75 percentage points in September. Chairman Jerome Powell said he expects interest rate hikes to continue as the Fed battles high inflation. Photo: Kevin Lamarque/Reuters
“We are very aware of what is happening in other economies around the world and what that means for us, and vice versa,” he said. “The forecasting that we have done, that our staff does together and that we do ourselves, we always have everything, it tries to take everything into account.”
The European Central Bank and the Bank of England are also raising their key interest rates faster than in recent decades. According to the World Bank, more central banks raised borrowing costs in July than at any time since records began in the early 1970s.
UNCTAD said that instead of raising rates, which will do little to ease energy and food shortages, policymakers should focus on measures that directly target price peaks, including caps of prices financed by one-time taxes on the unusually large profits made by many energies. companies
“Trying to solve a supply problem with a demand solution?” asked Richard Kozul-Wright, head of the team responsible for the report, in an interview. “We think that’s a very dangerous approach.”
UNCTAD noted that a July agreement between Russia and Ukraine that allowed more than a million tons of grain trapped in Ukrainian silos to be exported via the Black Sea had helped reduce world grain prices by 1.4 %.
The United Nations agency cut its forecast for global economic growth in 2022 to 2.5 percent from 2.6 percent in March and said it expects growth to slow to 2.2 percent in 2023 .
Write to Paul Hannon at paul.hannon@wsj.com
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