According to a new document from a United Nations (UN) agency, the United States’ central bank, the Federal Reserve, should slow down on interest rate increases.
Every year, the UN Conference on Trade and Development (UNCTAD) publishes a report of its findings from global economic observations. The UNCTAD claims that raising interest rates at a rapid pace puts the global economy in danger of recession, with poorer nations likely to suffer more severely than richer ones.
The Federal Reserve has increased interest rates five times this year in its effort to bring down inflation, which is nearing its highest levels in 40 years.
The Board of Governors of the Fed under Chair Jerome Powell’s leadership voted to raise the federal funds rate by 75 basis points last month, bringing the fed funds rate up to a range of 3% to 3.25%, which is the highest it has been since early 2008. For some perspective, the federal funds rates started the year at nearly 0%.
What’s more worrying to the UN organization is that in addition to steep interest rates, the Fed has signaled its intention to maintain tightening until the funds level reaches a “terminal rate,” or end point, of 4.6% in 2023.
It should be no surprise that the Federal Reserve’s primary goal behind these rate hikes is to control runaway inflation. In August, annual inflation rates were 8.3%. Meanwhile, food prices rose 11.4%, the highest since May of 1979.
The Fed’s rate hike policy acceleration, however, has alarmed investors and customers alike. In fact, there is a growing sense on Wall Street that the Federal Reserve will induce an economic recession as it raises interest rates at the quickest pace in three decades. This assumption is also supported by the UNCTAD- stating that the Fed’s actions may be too dramatic and may push the global economy into a painful recession, a period which would then be followed by a period of stagnation.
“Excessive monetary tightening could usher in a period of stagnation and economic instability,” the UNCTAD said in a statement accompanying the report. “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.”
“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,” UNCTAD Secretary-General Rebeca Grynspan told a press conference in Geneva, Switzerland.
“The current course of action is hurting vulnerable people everywhere, especially in developing countries. We must change course,” she continued.
The Fed, however, which is worth noting- knows that rapid rate hikes will tip the economy into a recession, has not given any indication of plans to change course.
In fact, Powell told reporters in Washington in September that the Fed is “committed to getting inflation back down to 2%”.
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