Washington, 3 Nov (Xinhua) -- The US Federal Reserve ended its two-day monetary policy meeting on 2 November and announced that it would raise the target range of the federal funds rate by 75 basis points to between 3.75 percent and 4 percent. This is the sixth consecutive rate hike by the Fed this year.
Analysts believe that the rapid rise in the US interest rate level from near zero to the highest level since January 2008 in one year is bound to affect the global economy and financial stability, and the process of economic recovery in the United States will also be affected.
Hint at a pace adjustment of interest rate hikes
The Fed pointed out in a statement released after the 2nd meeting that it would be appropriate to continue to raise the target range of the federal funds rate. At the same time, however, it was emphasized that the cumulative tightening effect of monetary policy, the lagging nature of the impact of monetary policy on economic activity and inflation, and economic and financial market developments will be taken into account when determining the pace of future rate hikes. This means that the Fed may adjust the pace and magnitude of rate hikes.
US Federal Reserve Chairman Jerome Powell attends a press conference in Washington on November 2. (Photo by Xinhua News Agency reporter Liu Jie)
Fed Chairman Jerome Powell said at a press conference after the meeting that he would stick to a tightening monetary policy stance until price stability is restored. He said the Fed will remain firmly committed to reducing inflation to its 2 percent target, sticking to tightening until the inflation target is met, and expects continued rate hikes to be appropriate.
In response to a reporter's question, Powell said the Fed may consider announcing a rate hike to 50 basis points in December or January, but it is "undecided" at this time.
Analysts believe that the Fed may be inclined to raise interest rates by a small 50 basis points at the December meeting, thereby avoiding a "hard landing" of the economy and a contraction in the labor market.
Affect global financial stability
Since March this year, the Fed has raised interest rates by 75 basis points six times in a row and four times in a row, accumulating 375 basis points. Under this influence, the US dollar has rapidly appreciated against a basket of major global currencies, causing turmoil in global financial markets.
The strength of the dollar, driven by fundamentals such as tightening U.S. monetary policy and the energy crisis, is posing serious challenges to many emerging markets, the International Monetary Fund's latest World Economic Outlook report, released in mid-October. The dollar is now at its highest level since the beginning of the century, leading to tighter global financial conditions and higher import costs.
International Monetary Fund (IMF) Managing Director Georgieva (right) attends a press conference in Washington, D.C., on October 13. (Photo by Xinhua News Agency reporter Liu Jie)
The IMF pointed out in its Global Financial Stability Report that the central banks of advanced economies such as the Federal Reserve have accelerated the pace of monetary policy contraction, triggering capital outflows from many emerging and frontier market economies with weak macroeconomic fundamentals. Due to high economic and geopolitical policy uncertainty, deteriorating global financial conditions and a sharp increase in financial stability risks, emerging markets are exposed to multiple risks.
Not only emerging market and developing economies are facing the financial shock caused by the Fed's interest rate hikes, but also geopolitical risk factors such as the Fed's current interest rate hike cycle and the energy crisis have also put pressure on developed economies.
The US "Fortune" magazine recently wrote that driven by the Fed's tightening cycle, the rapid strengthening of the dollar has pushed up the cost of imported goods, tightened financial conditions, and fueled inflation in other economies. Advanced economies are being hit hard by the dollar's appreciation to multi-decade highs.
Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics, believes that the strength of the dollar is usually accompanied by higher short- and long-term interest rates in the United States, increased pressure on global markets, and investors have turned to safe assets such as the dollar, leading to slower growth in advanced economies around the world.
Sayuri Shirai, a former governor of the Bank of Japan and a professor at Keio University, said other economies could not prevent the depreciation of their currencies by raising interest rates. Because "the strength of the dollar reflects not only market expectations of an increase in the federal funds rate, and thus higher demand for U.S. fixed income assets, but also the risk of a global recession from an unexpected increase in interest rates around the world."
It does not contribute to the growth of the country's economy
The Fed's excessive interest rate hike not only disrupts the order of the global financial market and affects global stable growth, but is also detrimental to the country's economic recovery.
Nobel laureate economist Paul Krugman recently said that the Fed's sharp increase in interest rates is the key reason for his fear of a recession in the United States. High interest rates will push up the dollar exchange rate, adversely affect trade, and will also raise mortgage costs, eroding the financial space and homebuying ability of American households.
People shop at a food supermarket in Washington, D.C., on September 13. (Xinhua News Agency, photo by Shen Ting)
Goldman Sachs CEO David Solomon expects the Fed's aggressive tightening of monetary policy to tip the U.S. economy into recession.
Steve Hanke, professor of applied economics at Johns Hopkins University, said in a recent interview with US media that if the Fed continues to tighten policy, the probability of the US economy falling into recession in 2023 is as high as 80% or even higher.
Mohammed El El-Er-Érian, chief economic adviser of Allianz Insurance Group, bluntly said that 3 mistakes made by the Fed that will "go down in history" are plunging the US economy into a "completely avoidable recession." He pointed out that when inflation concerns first appeared, the Fed "mischaracterized inflation as transitory, reversible, and worry-free." When the Fed recognized that inflation was "persistent and high," it also "did not take meaningful action" to curb inflation from rising. Right now, the Fed is raising interest rates quickly, pushing the U.S. economy into recession.
Jeremy Siegel, a professor at the Wharton School at the University of Pennsylvania, argues that the Fed has "made the biggest policy mistake in its nearly 110-year history over the past two years." One is to implement too loose monetary policy in 2020 and 2021, and the other is to tighten monetary policy excessively in 2022. And these two historic policy mistakes will "destroy the U.S. economy."
Source: Xinhua News Agency