UN warns Fed to cool interest rate hikes

A United Nations agency is urging the Federal Reserve to slow increases in the federal funds rate to avoid a recession.

“We have to change course”

The Federal Reserve needs to pump the brakes on interest rate hikes, according to a new report from a United Nations agency.

The report comes from the United Nations Conference on Trade and Development, which annually publishes its findings in its Global Economic Outlook. According to UNCTAD, the speed at which the Federal Reserve is raising interest rates puts the global economy at risk of recession, with poorer countries set to fare worse than richer ones.

Under the leadership of Chairman Jerome Powell, the US central bank has raised interest rates five times this year, most recently in September. On that occasion, the Fed raised the federal funds rate by 75 basis points, bringing the benchmark rate to between 3% and 3.25%. For perspective, federal funds rates started the year at nearly 0%.

The Fed’s overall goal behind these rate hikes is to tame inflation. At 8.3% last month, 2022 inflation rates have spooked investors and consumers alike – the average cost of food, for example, has risen 13.5% in the US since August 2021.

However, the UN agency claims that the Fed’s actions may be too dramatic and could push the global economy into recession. “Any belief that they (central banks) will be able to bring down rates by relying on higher interest rates without generating a recession is, the report suggests, an imprudent gamble,” it said in a statement which accompanies the report.

“If you want to use only one instrument to bring inflation down … the only option is to bring the world into a slowdown that will end in a recession,” UNCTAD Secretary-General Rebeca Grynspan said at a press conference in Geneva. “The current action plan is harming vulnerable people everywhere, especially in developing countries. We have to change course, she continued.

However, the Fed has not indicated any plans to reverse course yet.

Pain in front

The aggressive rate hikes are the Fed’s primary tactic to combat inflation caused by quantitative easing during the 2020-2021 COVID-19 pandemic. These measures, which included billions in cash payments to taxpayers, emergency loans to small businesses, medical equipment purchases, vaccine research, and dozens of other purposes, prompted the Federal Reserve to effectively issue new currency on an unprecedented scale.

Passed in haste and under threat of emergency, however, the COVID relief legislative packages also included significant “pork barrel” spending, or money wrangled into a legislative package by senators and members of Congress who wanted to bring funds back to home states and key constituents. Of some estimates, up to 35% of the $5.2 trillion spent on covid relief over the past three years were such pork line items. Further exacerbating the problem is the price tag of President Biden’s US bailout, which stands at $1.9 trillion and will be paid for, at least in part, by the central bank providing additional credit.

However, the time has come to pay the price for all that money printing. Powell, for his part, has been steadfast in his messages: rate hikes were inevitable this year, and for the most part, Powell has kept his word. In a speech at Jackson Hole in August he promised a difficult road ahead for investors, consumers, labor markets and virtually every other part of the economy. “These are the unfortunate costs of reducing inflation,” he said on the occasion, “but a failure to restore price stability will mean far greater pain.”

Disclosure: At the time of writing, the author of this piece owned BTC, ETH, and several other cryptocurrencies.