U.N. urges Federal Reserve to slow federal funds rate hikes to avoid recession

The report comes from the United Nations Conference on Trade and Development, which releases its annual findings on the global economic outlook. According to UNCTAD, the speed at which the U.S. Federal Reserve is raising interest rates puts the global economy at risk of recession, with poorer countries faring worse than richer ones.

Under the leadership of Chairman Jerome Powell, the U.S. central bank has raised interest rates five times this year, the last time in September. On that occasion, the Fed raised the federal funds rate by 75 basis points, bringing the benchmark rate to between 3 per cent and 3.25 per cent. By comparison, federal funds rates started the year near 0%.

The Fed’s main objective behind these rate hikes is to control inflation. At 8.3% last month, 2022 inflation rates have alarmed investors and consumers – the average cost of food, for example, has risen 10. 13.5% in the United States since August 2021.

However, the UN agency says the Fed’s actions could be too drastic and send the global economy into recession. “Any belief that they (central banks) will be able to lower prices by relying on higher interest rates without generating a recession is, according to the report, an unwise gamble” she said in a press release. release accompanying the report.

“If you want to use a single instrument to bring down inflation[…]the only possibility is to bring the world to a downturn that will end in a recession“, said UNCTAD Secretary-General Rebeca Grynspan at a press conference in Geneva. “The current course of action is harming vulnerable people everywhere, especially in developing countries. We must change course“she continued.

The Fed, however, has not yet indicated its intention to change course.

The pain to come

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

The time has come, however, to pay the price for all this money printing. Powell, for his part, was firm in his message: rate hikes were inevitably going to happen this year, and for the most part, Powell delivered. In a speech at Jackson Hole in August, he promised a tough road ahead for investors, consumers, labor markets and virtually every other sector of the economy. “These are the unfortunate costs of reducing inflation“, he said on that occasion, “but a failure to restore price stability would mean far greater pain.“