By raising interest rates, central banks are playing Russian roulette with the global economy
- The speed at which global interest rates have risen in the past year suggests central banks are ignoring the fact growth is slowing again
- Despite US Congress reaching a deal on the debt ceiling, the world could still face a major economic shock if the Fed keeps pressing too hard on inflation
The US central bank seems convinced the economy is still running too hot and keeping inflation too high in the process. It is clearly focused on factors such as the robust pace of headline job creation, which saw a bumper 339,000-job gain in non-farm payrolls in May – the highest in four months and way above market forecasts for a monthly rise of 190,000 jobs.
Even though US consumer price inflation has dropped fairly sharply from a 9.1 per cent peak last June to 4.9 per cent in April, it’s still too high for the Fed’s liking. The slow pace of moderation in core inflation – still elevated at 5.5 per cent in April – is causing policymakers most angst, as it is much too high compared to the Fed’s long term inflation goal of 2 per cent.
The market is taking a different slant and factoring in a 70 per cent probability that rates will remain unchanged at this week’s policy meeting, according to the CME Group’s FedWatch tool. The cost-of-living crisis is doing the real damage, badly undermining consumer confidence and leaving retail sales growth at a slack 1.6 per cent from a year ago.
The Fed is set for last rate hike this year. Will HSBC, Hong Kong banks follow?
If the Fed does raise rates again this week, it will be like playing Russian roulette with recession. The US recovery is far from secure and recession risks are already high; the economy only grew 1.3 per cent in the first quarter of 2023.
The central banks should learn a lesson from the children’s nursery rhyme, “The Grand Old Duke of York”. Marching interest rates up to the top of the hill and marching them down again is not the way to conduct responsible monetary policy.
The last thing central banks should be doing is adding to economic instability and financial volatility with ill-timed policy changes. It’s time to bend with the wind and ease the global economy’s pain.
David Brown is the chief executive of New View Economics