Beijing, China | Xinhua | The U.S. Federal Reserve announced earlier this month the fourth consecutive three-quarter point interest rate hike to cool record levels of inflation, another aggressive move leaving economists fearing a recession ahead.
The Fed has committed to hawkish rate hikes to fight inflation while standing by as the U.S. economy shifts into reverse. The move is a political calculation to take advantage of the U.S. dollar’s dominance in the international monetary and trade system to pass domestic risks to the outside world and leave the United States unscathed.
Analysts noted that amid partisan wrangling and other systemic flaws, the United States continues to introduce destructive policies that weigh on the world economy by driving up global prices, disturbing financial markets and undermining the global economic and trade order.
U.S. gross domestic product grew at an annual rate of 2.6 percent, up from declines of 1.6 percent in the second quarter and 0.6 percent in the third quarter, the Bureau of Economic Analysis reported in late October. However, growth in consumer spending, which accounts for about 70 percent of U.S. economic output, slowed to a 1.4-percent rate from the April-June quarter’s 2.0-percent pace.
Given an economic contraction in two consecutive quarters, declining consumer spending and a weakening housing market, many experts believe that a recession could be a slam dunk.
“A smaller trade deficit fueled the 2.6-percent annualized increase in U.S. GDP in the third quarter,” Nobel laureate economist Paul Krugman was quoted as saying by Business Insider in an article published on Oct. 28.
Growth drivers will disappear as the dollar’s surge this year has made U.S. exports less competitive, and overseas recessions could sap demand for U.S. products, Krugman said.
He noted that the Fed’s rate hikes since March are “the key reason” for a possible economic downturn, adding that “higher rates have created a trade headwind by boosting the dollar, and eaten into Americans’ finances and ability to buy houses by raising mortgage costs.”
Jeremy Siegel, professor at the Wharton School of the University of Pennsylvania, called the current Fed’s monetary policy “the third worst in the 110-year history of the Fed” at a conference hosted in September by Wharton’s Jacobs Levy Equity Management Center.
He told CNBC in early October that the Fed is “slamming on the brakes way too hard” with its continuous rate hikes this year. “The risks of recession are extremely high,” he warned.
“Tightening monetary policy to fight inflation would increase one type of pain for another,” U.S. billionaire investor and hedge fund manager Ray Dalio told Xinhua.
The Fed’s latest jumbo-size rate hike takes its policy rate to a new target range of 3.75 to 4 percent, the highest level since January 2008. To bring down inflation, the Fed has raised interest rates six times this year with a total increase of 375 basis points and is much more likely to raise rates again in December.
Yet the whirlwind has made little progress. The New York Times in mid-October wrote, “the so-called core index climbed by 6.6 percent, the fastest pace since 1982 and more than economists had expected.”
In late October, Yahoo Finance columnist Rick Newman said, “the withering effect of inflation on living standards has pushed consumer confidence close to all-time lows.”
In the 10th anniversary of the Fed’s quantitative easing applied during the global financial crisis in 2008, J. Bradford Delong, professor of economics at the University of California, Berkeley, noted in an article titled “The Ahistorical Federal Reserve” that the Fed has internalized none of the lessons economic developments in the past have taught.
“The Fed’s process of getting from a realistic view of the economy to an appropriate monetary policy does not seem to be functioning well at all,” he wrote.
Indeed, once the COVID-19 pandemic shook the U.S. economy, the Fed resorted again to an aggressive easing strategy. “Last year’s shockingly irresponsible monetary policy led to most of today’s inflation,” U.S. public policy analyst Michael Busler wrote in mid-October.
In his book “Secrets of the Temple: How the Federal Reserve Runs the Country,” U.S. journalist William Greider noted that the central bank has regularly yielded to inflation, “failing to resist the short-term political pressures for economic growth.”
Adding to the Fed’s aggressive monetary policy is the expansionary fiscal policy by lawmakers in Congress that has catered to the short-term interest of U.S. campaign politics, featuring such moves as heavy spending from stimulus measures and sweeping tax cuts, which have made it even harder to contain runaway prices.
“There is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation,” former U.S. Treasury Secretary Lawrence Summers warned about inflationary risks back in February 2021.
But such risks have been downplayed by Washington and the Fed. It was until December 2021 that Fed Chair Jerome Powell said it was no longer his view that “price increases are not particularly large or persistent.”
In the late 1970s, then U.S. Fed Chair Paul Volcker significantly raised the Fed’s interest rate to control inflation, bitter medicine which led to not one but two recessions in the country before prices finally stabilized. The world beyond the United States suffered more as the interest rate shock touched off a debt crisis across Latin America and triggered a worldwide recession.
Now, many experts think of Powell as “Volcker’s wannabe second coming” and worry about another Volcker Shock given the Fed’s current aggressive moves, which, just like then, will take a heavy toll on places outside the United States.
The rest of the world has already felt the pain. In October, inflation in the eurozone is expected to reach a new record high of 10.7 percent. Japan’s consumer price index leaped 3 percent in September, marking the sharpest gain in 31 years. Average inflation in Africa is projected to accelerate to 13.5 percent in 2022.
On Oct. 11, the International Monetary Fund forecasted that global economic growth will slow from 3.2 percent this year to 2.7 percent in 2023, citing a long list of threats, including chronic inflation pressures, war-driven energy and food prices and punishing interest rates, many of which were induced by poisonous U.S. policies.
Global borrowers are feeling the squeeze as the Fed’s dramatic rate hikes have boosted the dollar’s value and fed higher borrowing costs. In an article titled “Strong U.S. Dollar Is Wreaking Havoc Across Pretty Much Every Country,” Fortune magazine noted it is “ratcheting up pressure” on other major central banks to raise interest rates. Yet, they have a “limited” ability to “influence the dollar’s strength.”
President of the European Central Bank Christine Lagarde recently said that “a mild recession” in the eurozone is possible in late 2022 and early 2023. The UN Conference on Trade and Development noted around 90 developing countries have seen their currencies weaken against the dollar this year, over one-third of them by more than 10 percent. The International Monetary Fund said about 60 percent of low-income developing countries are already at high risk of or in debt distress.
U.S. rate hikes are inhumanely affecting Sri Lanka’s economy, Samitha Hettige, an expert on strategic studies, told Xinhua. “We have seen massive capital inflows to the United States and increased outflows from the developing world. If you look at the Sri Lankan stock market, you can see this.”
The All Share Price Index, one of the principal stock indices of the Colombo Stock Exchange in Sri Lanka, dropped from over 13,000 points in mid-January to some 8,000 points in mid-November.
In the meantime, as the United States resorted to protectionism and de-globalization to bolster its domestic industries, it has pushed up trade costs and worsened international relations.
CNBC said in early November the EU has “serious concerns” about the U.S. Inflation Reduction Act, a sweeping tax, health and climate bill approved by U.S. lawmakers in August, as it breaches international trade rules. Financial Times noted in late October the growing threat of a trade war between the EU and the United States over the act.
To sustain its hegemony, the United States has been busy fanning the flames of instability amid geopolitical tensions, which has hurt investment intention and crippled economic activities.
Cliff Kupchan, chairman of Eurasia Group, wrote in late October that an escalating Ukraine crisis “will propel ongoing deglobalization and decoupling,” causing commodity and supply shocks and burning firms with both import risks and price shocks.
“America’s problems are problems of poor policy,” former Fed Chair Alan Greenspan and Economist writer Adrian Wooldridge wrote in the book “Capitalism in America: A History.”
“America’s politics have taken a populist turn,” they said.