UN Warns Fed to Cool Rate Hikes
As inflation runs rampant, the Federal Reserve's only play seems to be raising interest rates, but doing so carries significant risk.
- A UN agency has urged the Federal Reserve to slow the pace at which it is raising the federal funds rate.
- The Fed has been authorizing steep rate hikes throughout 2022 in an effort to combat rampant inflation.
- The UN report argues that poor countries will suffer disproportionately as a result of any imminent recession.
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A UN agency is urging the Federal Reserve to slow its increases in the federal funds rate to avoid recession.
“We Must Change Course”
The Federal Reserve needs to pump the brakes on interest rate hikes, according to a new report from a U.N. agency.
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 to between 3% and 3.25%. For perspective, 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 is claiming the Fed’s actions may be too dramatic and may push the global economy into recession. “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,” it said in a statement accompanying the report.
“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,” said UNCTAD Secretary-General Rebeca Grynspan in a press conference in Geneva. “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.
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 to 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.”
Disclosure: At the time of writing, the author of this piece owned BTC, ETH, and several other cryptocurrencies.