The Fed’s aggressive tightening of its policy has resulted in the U.S. dollar getting to record highs in several decades and crushing other currencies.
At the moment, a United Nations agency is raising the alarm about a possible danger of bringing the global economy closer to recession. Such a possibility might be triggered by actions of the Fed and other central banks.
As it was stated in a new Trade and Development report released by the United Nations Conference on Trade Development (UNCTAD), further tightening of monetary policy aimed at inflation curbing might actually turn out more harmful than the 2008 financial crisis and the 2020 economical shock induced by the coronavirus pandemic.
According to an estimation made by the agency in its report, each rate hike of 1% would reduce the economic output of other developed countries by half a percent in the following three years, while in less wealthy countries the reduction would be by 0.8% over the same period of time. It’s linked to the fact that imported essential goods, such as food and fuel, get more expensive for the rest of the world as the dollar strengthens. A strong dollar particularly puts less developed countries under pressure, as they have to pay their debt obligations using the dollar.
It was reported that possible future income of developing countries might be slashed by $360 billion this year only by increasing of interest rates in the U.S. due to the growing value of the U.S. dollar.
The Fed’s course of action was called an “imprudent gamble” by the U.N. agency. It claimed that developing countries might face a sequence of debt crises and difficulties in the areas of health and climate if central banks don’t change their current course.
According to a warning made by World Bank President David Malpass, a rare but possible combination of stagflation and a worldwide recession might cancel the results of multi-year economic development. A possibility of recession was also acknowledged by World Trade Organization Director-General Ngozi Okonjo-Iweala.
Meanwhile, UNCTAD Secretary-General Rebeca Grynspan mentioned several other ways to reduce inflation without further rate hikes. For instance, she spoke about a possibility for some countries to introduce a windfall tax in a form of a one-time levy for the oil and gas industry, as businesses in that segment might be getting unexpectedly high profits.
As it was said by Grynspan, there’s still some time to avoid getting too close to recession.
The U.N. governments have approved charging oil and gas companies with windfall taxes, but it’s still improbable that the U.S. Congress will make any similar moves in anticipation of the midterm elections scheduled to be held in November.
The U.N. report won’t perhaps convince the executives of central banks to change their decisions. Federal Reserve Vice Chair Lael Brainard noted that a premature retreat from battling inflation would bring a worse outcome, although she agreed that a strong dollar is affecting the inflation pressure all over the world.
In the opinion of central banks and economists, if this inflation pressure isn’t stopped, it might have a devastating effect on the global growth and wealth. This view was expressed by chief economist of Eurasia Group Robert Khan.