As inflation runs rampant, the Fed's only play seems to be raising interest rates, which carries significant risk.
Key Takeaways
- A UN agency has urged the U.S. Federal Reserve to slow the pace at which it is raising the federal funds rate.
- The Fed has authorized steep rate hikes throughout 2022 to combat rampant inflation.
- The UN report argues that poor countries will suffer disproportionately due to any imminent recession.
A UN agency is urging the Federal Reserve to slow its increases in the federal funds rate to avoid recession.
“We Must Change Course”
According to a new report from a U.N. agency, the Federal Reserve needs to pump the brakes on interest rate hikes.
The report comes from the United Nations Conference on Trade and Development, which annually publishes its global economic outlook findings. According to the UNCTAD, the speed at which the Federal Reserve is raising interest rates puts the global economy at risk of recession, with poorer countries standing to fare worse than richer ones.
Under the leadership of Chair Jerome Powell, the United States central bank has raised interest rates five times this year, most recently in September. On that occasion, the Fed raised the federal funds rate by 75 basis points, bringing the benchmark rate between 3% and 3.25%. The federal funds' rates started the year at nearly 0%.
The Fed’s overarching goal behind these rate hikes is to tame inflation. Coming in last month at 8.3%, 2022’s inflation rates have alarmed investors and consumers alike—the average cost of food, for example, has risen 13.5% in the United States since August 2021.
However, the UN agency claims the Fed’s actions may be too dramatic and push the global economy into recession. A statement accompanying the report was as follows,
“Any belief that they (central banks) will be able to bring down prices by relying on higher interest rates without generating a recession is, the report suggests, an imprudent gamble,”
UNCTAD Secretary-General Rebeca Grynspan said in a press conference in Geneva,
“If you want to use only one instrument to bring inflation down…the only possibility is to bring the world to a slowdown that will end up in a recession. The current course of action is hurting vulnerable people everywhere, especially in developing countries. We must change course,” she continued.
The Fed, however, has not indicated any plans to reverse course yet.
Pain Ahead
The aggressive rate hikes are the Fed’s primary tactic to combat inflation brought about by emergency quantitative easing during the COVID-19 pandemic from 2020- 2021. Those measures, which included billions in cash payouts to taxpayers, emergency small business loans, medical equipment purchases, vaccine research, and dozens of other purposes, prompted the Federal Reserve to effectively issue new currency on an unprecedented scale.
Passed in haste and under threat of emergency, however, COVID relief legislation packages also included significant “pork barrel” spending, or monies wrangled into a legislation package by senators and members of Congress looking to bring funds back to their home states and key constituents.
By some estimates, up to 35% of the $5.2 trillion spent on COVID relief over the last three years were such pork barrel line items. Further exacerbating the problem is the price tag on President Biden’s American Rescue Plan, which accounts for $1.9 trillion and will be paid for, at least in part, by the central bank extending further credit.
The time has come, however, to pay the price for all that money-printing. Powell, for his part, has been steadfast in his messaging: rate hikes were inevitably going to happen this year, and for the most part, Powell has kept his word.
In a speech at Jackson Hole in August, he promised a rough road ahead for investors, consumers, labor markets, and virtually all other parts of the economy. “These are the unfortunate costs of reducing inflation,” he said on that occasion, “but a failure to restore price stability would mean far greater pain.”