The Federal Reserve's aggressive tightening policy has led the US dollar to appreciate to multi-decade highs, squashing currencies around the world.
Now, a United Nations agency is warning that its actions, along with those of other central banks, risk pushing the global economy into recession.
What's happening: In a new report, the United Nations Conference on Trade Development (UNCTAD) said that tightening monetary policy, meant to fight inflation, could inflict worse damage globally than the financial crisis in 2008 and the Covid-19 shock in 2020.
The agency estimated in its report that each percentage-point increase in the Fed's push to hike interest rates would lower the economic output of other rich countries by 0.5% and the economic output in less developed countries by 0.8% over three years. That's because a strong dollar makes it more expensive for other countries to import essential items like food and fuel. An elevated greenback especially crushes poorer countries that must meet their debt obligations in dollars.
US interest rate increases this year alone could cut $360 billion of future income for developing countries by driving up the value of the US dollar, the UN report found.
The UN agency called the Fed's actions an "imprudent gamble" with the lives of those less fortunate. If central banks don't "course correct," the UN agency said, emerging countries could tumble into a series of debt crises and health and climate emergencies.
A growing consensus: The UN agency joins a growing chorus of organizations expressing worry about the global economic climate.
World Bank President David Malpass last week warned that a "perfect storm" of stagflation and global recession could reverse years of economic development. World Trade Organization Director-General Ngozi Okonjo-Iweala also said last week that the world was "edging" into recession.
The International Monetary Fund recently downgraded its economic projections for 2023 and India's central bank said on Friday that the global economy was experiencing a shock because of monetary policy.
An alternative to rate hikes: There's more than one way to lower inflation rates, argued UNCTAD Secretary-General Rebeca Grynspan. For instance, countries could implement a windfall tax — a one-time levy on an industry that has experienced unusually high profits — on oil and gas companies.
"There's still time to step back from the edge of recession," she said.
EU governments have already agreed to tax the windfall profits of oil and gas companies, but it's exceedingly unlikely that the US Congress will approve any new taxes ahead of the midterm elections in November.
The bottom line: The UN report probably won't change the minds of central bankers. Federal Reserve Vice Chair Lael Brainard said last week that while a higher US dollar exerts inflationary pressures around the globe, retreating from the inflation fight prematurely would have worse ramifications.
Central banks and economists believe that, "if left unchecked, these inflationary pressures could prove hugely destructive to global growth and welfare," Robert Khan, chief economist of Eurasia Group, told me.
Comments
Post a Comment