The Federal Reserve’s aggressive tightening policy has pushed the US dollar to multi-decade highs, crushing currencies around the world.
Now, the United Nations has warned that its actions, along with those of other central banks, risk pushing the global economy into recession.
What’s happening: In a new report, the United Nations Conference on Trade Development (UNCTAD) said that monetary policy tightening aimed at fighting inflation could cause worse damage worldwide than the 2008 financial crisis and the 2020 Covid-19 shock.
The agency estimated in its report that each percentage point increase in the Fed’s stimulus to raise interest rates would reduce economic output in other rich countries by 0.5% and economic output in less developed countries by 0.8% over three years. That’s because a strong dollar makes it more expensive for other countries to import essential items like food and fuel. A high greenback mainly oppresses poorer countries that have to meet their debt obligations in dollars.
US interest rate hikes this year alone could cut $360 trillion from developing countries by raising the value of the US dollar, a UN report found.
The UN agency called the Fed’s actions a “reckless gamble” on the lives of the less fortunate. The UN agency said that if central banks do not do “the right thing of course”, emerging countries could face a series of debt crises and health and climate emergencies.
A growing consensus: The UN agency joins a growing chorus of organizations expressing concern about the global economic climate.
World Bank President David Malpass last week warned that a “perfect storm” of stagflation and global recession could reverse years of economic development. World Trade Organization director-general Ngozi Okonjo-Iweala also said last week that the world was teetering on the “edge” of recession.
The International Monetary Fund recently downgraded its economic forecast for 2023 and India’s central bank said on Friday that the global economy was facing a shock due to monetary policy.
An alternative to raising the rate: There is more than one way to reduce inflation rates, said Rebeca Grynspan, Secretary General of UNCTAD. For example, countries can impose a profits tax—a one-time levy on an industry that has traditionally been profitable—on oil and gas companies.
“There is still time to pull back from the brink of recession,” he said.
EU governments have already agreed to tax the profits of oil and gas companies, but it is highly unlikely that the US Congress will pass any new taxes before mid-term elections in November.
Bottom line: The UN report is unlikely to change the minds of central bankers. Federal Reserve Vice Chairman Lael Brainard said last week that while a stronger U.S. dollar is causing inflationary pressures around the world, an early retreat from the inflation battle would have worse consequences.
Central bankers and economists believe, “If left unchecked, these inflationary pressures could be incredibly destructive to global growth and well-being,” Robert Khan, chief economist at the Eurasia Group, told me.
Shares of Credit Suisse fell to a new record low on Monday before recovering as jittery investors trained their focus on the Swiss bank, colleague Julia Horowitz reported.
The cost of insuring Credit Suisse’s debt against default, measured by credit-default swaps, rose, raising concerns about the bank’s ability to stay afloat.
The lender has been hit by several scandals and regulatory lapses in recent years, costing it billions and leading to a top management shakeup. But it faces renewed scrutiny after a memo Ulrich Körner shared with CNN Business on Friday.
Körner sought to reassure colleagues about the bank’s financial health ahead of unveiling a restructuring plan later this month.
“I know it’s not easy to stay focused among the many stories you read in the media, especially given the misrepresentations of the truth,” Körner wrote. “That said, I think you’re not confusing our daily share price performance with the bank’s strong capital base and liquidity position.”
He emphasized that the bank remains on a solid basis. But if customers get nervous and start cashing out, it can create a harmful feedback loop.
There is also the fear that the collapse of a large bank could spread, as at Lehman Brothers in September 2008 broke the financial crisis.
Citigroup analyst Keith Horowitz wrote in a note that he had received inquiries about the “contamination effect” of US banks, but said he saw no cause for concern. “We think US bank stocks are very attractive here,” Horowitz said.
U.S. banks have significantly more capital than they did at the time of Lehman’s collapse, he said. “We understand the nature of the concerns, but the current situation has been night and day since 2007.”
The British government is pulling back on plans to scrap the top rate of income tax, announcing an embarrassing delay after a revolt among its lawmakers and a week of financial and economic turmoil, my colleagues Mark Thompson and Adam Renton report.
In a statement on Monday, Finance Minister Kwasi Kwarteng said the tax cut for people earning more than £150,000 ($170,000) had become a “distraction” from the government’s wider package of measures to tackle the energy crisis and cut taxes more broadly. efforts to end years of economic hardship.
“We got it, and we heard it,” he said.
The announcement marks a sharp and dramatic setback for new Prime Minister Liz Truss, whose government has been rocked by the backlash over proposed sweeping tax cuts, including a cut in the top rate of income tax from 40% to 45%.
The cuts plunged the pound to historic lows against the US dollar and sparked chaos in the UK debt market, which will require a big increase in government borrowing. Mortgage rates rose, and some pension funds remained insolvent.
Only an emergency intervention last Wednesday by the Bank of England restored a degree of order, saying it would buy 65 trillion pounds ($73 billion) of UK government bonds.
The Bureau of Labor Statistics releases U.S. job vacancies and job listings (JOLTS) at 10 a.m. ET.
It will come tomorrow: OPEC+ meets to discuss energy markets and could agree to cut production due to the recent drop in oil prices. OPEC is responsible for almost 40% of the world’s oil supply.