The Fed raises its interest rates; The World Bank wonders if the global recession is approaching

Jhe Federal Reserve Board of Governors again raised interest rates by three-quarters of a point and the action again sparked speculation about whether the latest inflation control measure will have the unintended consequence to trigger a recession.

The Fed’s latest rate-hike action came on Sept. 21, less than a week after the World Bank released a report indicating the world could be heading for a global recession in 2023. World Bank study, “Is a Global Recession Imminent? ” said interest rate hikes and other policy measures may not be enough to bring global inflation back to levels seen before the Covid-19 pandemic. The World Bank has said that interest rates set by central banks can be expected to reach nearly 4% in 2023. It predicts that global inflation calculated without energy costs could be brought down to an average of 5%, which, although lower than the 8.3% with energy included that was reported for August in the United States and 13% reported in Europe would still be almost double the five-year average before the pandemic.

David Malpass

“Global growth is slowing sharply, and further slowing is likely as more countries enter recession. My deep concern is that these trends continue, with lasting consequences that are devastating for people in emerging markets and developing economies. development,” said World Bank Group President David Malpass. “To achieve low inflation rates, monetary stability, and faster growth, policymakers could shift their focus from reducing consumption towards increased production Policies should seek to generate additional investment and improve productivity and capital allocation, which are essential for growth and poverty reduction.

The World Bank has observed that global consumer confidence has already suffered a much steeper decline than in the run-up to previous global recessions. The economies of the United States, China and the European Union have slowed sharply and the World Bank suggests that in the past the expansion of economic activity has been encouraged rather than discouraged, as has been the case to fight against inflation.

“The recent tightening of monetary and fiscal policies will likely prove helpful in reducing inflation,” said Ayhan Kose, the World Bank’s acting vice president for inclusive growth, finance and institutions. “But because they are so synchronous across countries, they could worsen each other by tightening financial conditions and adding to the slowdown in global growth. Policymakers in emerging markets and developing economies must be prepared to manage the potential fallout from a synchronous tightening of policies on a global scale.

World Bank Headquarters building in Washington, DC Photo via Google Maps.

The World Bank study states that “while the degree of global monetary policy tightening currently anticipated by markets is not sufficient to bring inflation back to target, experience from past global recessions suggests that further tightening required could give rise to significant financial stress and trigger a global crisis. recession in 2023.

The study was not entirely gloomy, however, with the World Bank stating: “Our analysis indicates that the global economy could escape a recession even if further monetary policy tightening beyond current market expectations is needed to reduce inflation. However, this would require that the additional tightening be implemented in a way that generates an orderly adjustment of financial markets. More importantly, policymakers must use the full menu of options available to get ahead of inflation and reduce the likelihood of a deeper decline in growth.

The World Bank has also said that central banks must be transparent in what they do.

“Transparency in the conduct of policies reduces the risk of sudden market disruptions and financial stress, and increases the likelihood that public expectations will align with announced policy goals,” the study said.

The World Bank notes that over the past 50 years, global recessions have occurred when the world economy suffered exceptionally large supply-side shocks, such as in 1973 and 1974 when world oil supplies were greatly reduced. Various shocks have affected the global supply chain recently, including Russia’s reduction of its oil and natural gas exports in retaliation for Western support for Ukraine.

“Given that the global economy has already suffered a severe supply shock earlier this year, the main additional risk to the outlook appears to be the possibility of larger-than-expected policy adjustments accompanied by acute financial strains,” says the study. “Central banks may need to do more to bring inflation back to target levels than financial markets currently expect, just as in many advanced economies the extent of monetary policy tightening has exceeded expectations before the 1982 recession. Moreover, this kind of abrupt policy adjustment could trigger financial market stress, as was the case in the 1982 episode.”

The World Bank study suggested that supply shocks could be addressed by policies that help increase labor force participation and reduce price pressures. The study indicates that labor market policies can facilitate the reassignment of displaced workers.

The study also suggested that global coordination can go a long way to increasing food and energy supplies. For energy products, policymakers should accelerate the transition to low-carbon energy sources and introduce measures to reduce energy consumption.

The study also called for strengthening global trade networks with policy makers cooperating to ease global supply bottlenecks. They should support a rules-based international economic order that protects against the threat of protectionism and fragmentation that could further disrupt trade networks.

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