US Fed meets amid fears of global recession and financial turmoil
The U.S. Federal Reserve’s Monetary Policy Setting Committee begins a two-day meeting today in which it is expected to announce a further 0.75 percentage point (75 basis points) hike in interest rates. interest despite growing fears that the US economy could soon enter a recession if it isn’t already in one.
Consumer confidence is at an all-time high and yesterday the largest US retailer, Walmart, released a statement that said rising food and fuel prices were prompting consumers to cut spending in other areas. The the wall street journal (WSJ) called the announcement “an ominous sign for the U.S. economy which has relied on the resilient purchasing power of households thanks to inflation.”
With Fed officials appearing to have backed off from a full one percentage point hike, the Fed’s further rate hike to be announced tomorrow afternoon will add pressure on central banks around the world. so that they also raise their rates in order to protect their currencies and reduce the transmission of inflation through higher import prices.
Interest rate hikes in the United States, which began in March, are driven by rising inflation which reached an annual rate of 9.1% in June and the determination of the Fed, acting as the l executor of corporate interests and finance capital, ensuring that a working class wage movement in response to rising prices is crushed by a slowing economy.
While there are some indications that the commodity price increases that triggered the inflationary spiral are easing, there are warnings that the inflationary push is spreading throughout the economy.
Former Fed Vice Chairman Donald Kohn told Bloomberg that “inflation is entrenched and spreading.”
This view was echoed by Goldman Sachs CEO David Solomon in the WSJ’s CEO Outlook Survey.
“We consider inflation to be deeply entrenched in the economy,” he said. “In my dialogue with the CEOs of major global companies, they tell me that they continue to see persistent inflation in their supply chains. Our economists, meanwhile, say there are signs that inflation will decline in the second half of the year The answer is uncertain.
This uncertainty led to significant swings on Wall Street, with the market rising one day in the belief that the Fed might withdraw monetary tightening in the face of recession threats and then falling the next day.
But there are growing calls for the Fed not to implement a “stop-go” policy and continue with rate hikes even in recessionary conditions.
Former U.S. Treasury Secretary Lawrence Summers, who said a 10% unemployment rate for a year was needed to stop inflation, told Bloomberg Television his instinct was “you wouldn’t see a drop rates as soon as people think about it”.
“The Fed needs to be careful. If you look at the history of the 60s and 70s, there were times when monetary policy loosened a bit and things didn’t work out so well,” he said.
All central banks are now engaged in monetary policy tightening as increases of 50 basis points become the norm, with some increases even higher as occurred earlier this month when the Canadian central bank raised its rate by 100 basis points, the largest of any G7 economy since 1998.
According to FinancialTimes (FT), in the three months to June, 62 policy rate hikes of at least 50 basis points were made by 55 central banks, with another 17 increases of 50 basis points or more so far this month -this.
The underlying motivation for the rate hikes, which by themselves will do nothing to lower prices, was described by Jennifer McKeown, head of global economics at Capital Economics, in comments to the FT.
Central banks, she said, needed to act quickly to get rates out of “stimulative” territory, “especially in an environment where wage growth and inflation expectations are rising and there is a risk that inaction allows wage-price spirals to develop”.
In other words, rates must be raised quickly to crush the growing international wage struggles of the working class in conditions where the standard of living is reduced daily.
Last week, the European Central Bank (ECB) joined the 50 basis point club when it abandoned its previous “forward guidance” of a 25 basis point hike and signaled that further hikes would come.
The bigger-than-expected rise was the result of an agreement among the so-called ECB Governing Council hawks who lobbied for it. In return, they signed the so-called transition protection instrument under which the ECB will buy the bonds of the most indebted countries, in particular Italy, if interest rates on public debt deviate sharply. from those of Germany.
The “anti-fragmentation” policy aims to try to prevent a resurgence of the crisis that developed in 2012 when the sustainability of the euro was threatened.
Speaking in favor of the new measures, which will not have a pre-decided limit, ECB President Christine Lagarde said the central bank was “capable of going big”. She said the ECB would prefer not to use the new program “but if we have to use it, we won’t hesitate”.
On the same day the new policy was announced, Italy’s government, led by former ECB President Mario Draghi, collapsed, raising the risk of fragmentation amid fears that elections, due in September, do not produce a stable government, much less a government capable of implementing the kind of austerity measures required to ensure financial support.
Added to the prospect of persistent financial and economic turmoil is the problem of Russian gas supplies to Germany. As Russia resumed gas supply through the Nord Stream 1 pipeline last week after it was shut down for maintenance, supply was only 40% running, casting doubt on whether it could accumulate enough reserves to the winter months.
The situation escalated yesterday when Russian gas producer Gazprom announced that exports through the pipeline would be cut by 20% due to problems returning a turbine for repair to Canada due to the sanctions regime imposed on Russia.
At the same time, the Ifo Institute, a leading economic research body, warned: “Germany is on the brink of recession.”
Summarizing the problems facing the ECB, Krishna Guha, head of central banking policy and strategy at US investment bank Evercore, told the FT that “the combination of a giant gas-stirring stagflationary shock natural Russian armed and a political crisis in Italy” was about as close to a “perfect storm as one could imagine”.
As Wall Street continues to turn, major investors have cut their stock allocations to the lowest level since the collapse of Lehman Brothers in 2008, according to an FT article last week, reporting on a survey by the Bank of America.
Michael Hartnett, chief investment strategist at the bank, said investors had reached an “extreme level” of pessimism over fears that tighter monetary policy could lead to a general slowdown in the global economy.