US interest rates hit 14-year high in inflation battle; Fed chief Powell vows to 'keep at it'

[beijingwalker]

US interest rates hit 14-year high in inflation battle; Fed chief Powell vows to 'keep at it'​

Sept. 22 2022
WASHINGTON - Federal Reserve Chair Jerome Powell vowed on Wednesday that he and his fellow policymakers would "keep at" their battle to beat down inflation, as the US central bank hiked interest rates by three-quarters of a percentage point for a third straight time and signalled that borrowing costs would keep rising this year.

In a sobering new set of projections, the Fed foresees its policy rate rising at a faster pace and to a higher level than expected, the economy slowing to a crawl, and unemployment rising to a degree historically associated with recessions.

Powell was blunt about the "pain" to come.

He cited rising joblessness and singled out the housing market, a persistent source of rising consumer inflation, as being likely in need of a "correction".

Earlier on Wednesday, the National Association of Realtors reported that US existing home sales dropped for a seventh straight month in August.

The United States has had a "red hot housing market... There was a big imbalance," Powell said in a news conference after Fed policymakers unanimously agreed to raise the central bank's benchmark overnight interest rate to a range of 3.00 per cent to 3.25 per cent.

"What we need is supply and demand to get better aligned ... We probably in the housing market have to go through a correction to get back to that place."

That theme, of a continuing mismatch between US demand for goods and services and the ability of the country to produce or import them, ran through a briefing in which Powell stuck with the hawkish tone set during his remarks last month at the Jackson Hole central banking conference in Wyoming.

Recent inflation data has shown little to no improvement despite the Fed's aggressive tightening - it also announced 75-basis-point rate hikes in June and July - and the labour market remains robust with wages increasing as well.

The federal funds rate projected for the end of this year signals another 1.25 percentage points in rate hikes to come in the Fed's two remaining policy meetings in 2022, a level that implies another 75-basis-point increase in the offing.

"The committee is strongly committed to returning inflation to its 2 per cent objective," the central bank's rate-setting Federal Open Market Committee said in its policy statement after the end of a two-day policy meeting.

The Fed "anticipates that ongoing increases in the target range will be appropriate."

Growth slowdown​

The Fed's target policy rate is now at its highest level since 2008 - and new projections show it rising to the 4.25 per cent to 4.50 per cent range by the end of this year and ending 2023 at 4.50 per cent to 4.75 per cent.

Powell said the indicated path of rates showed the Fed was"strongly resolved" to bring down inflation from the highest levels in four decades and that officials would "keep at it until the job is done" even at the risk of unemployment rising and growth slowing to a stall.

"We have got to get inflation behind us," Powell told reporters. "I wish there were a painless way to do that. There isn't."

Inflation by the Fed's preferred measure has been running at more than three times the central bank's target. The new projections put it on a slow path back to 2 per cent in 2025, an extended Fed battle to quell the highest bout of inflation since the 1980s, and one that potentially pushes the economy to the borderline of a recession.

The Fed said that "recent indicators point to modest growth in spending and production", but the new projections put year-end economic growth for 2022 at 0.2 per cent, rising to 1.2 per cent in 2023, well below the economy's potential.

The unemployment rate, currently at 3.7 per cent, is projected to rise to 3.8 per cent this year and to 4.4 per cent in 2023. That would be above the half-percentage-point rise in unemployment that has been associated with past recessions.

"The Fed was late to recognise inflation, late to start raising interest rates, and late to start unwinding bond purchases. They've been playing catch-up ever since. And they're not done yet," said Greg McBride, chief financial analyst at Bankrate.

US stocks, already mired in a bear market over concerns about the Fed's monetary policy tightening, ended the day sharply lower, with the S&P 500 index skidding 1.8 per cent.

In the US Treasury market, which plays a key role in the transmission of Fed policy decisions into the real economy, yields on the 2-year note vaulted over the 4 per cent mark, their highest levels since 2007.

The dollar hit a fresh two-decade high against a basket of currencies, gaining more than 1 per cent. The US currency's strength - it has appreciated by more than 16 per cent on a year-to-date basis - has stoked concern at central banks around the world about potential exchange rate and other financial shocks.

Some are not even trying to match the Fed's blistering pace of tightening, with the Bank of Japan on Thursday expected to hold fast to its ultra-easy policy and keep its policy rate at minus 0.1 per cent, likely leaving it as the last major monetary policy authority in the world with a negative policy rate.

Others are making an effort to stay somewhat abreast of the Fed. The Bank of England, for example, is expected to lift its policy rate by at least half a percentage point on Thursday. REUTERS

US interest rates hit 14-year high in inflation battle; Fed chief Powell vows to 'keep at it'

He signalled that borrowing costs would keep rising this year. Read more at straitstimes.com.

www.straitstimes.com

 

[beijingwalker]

US dollar global domination is the root of all evils, it makes US easily shift its woes to the world and rob the limited hard won wealth of the developing countries.

 

[beijingwalker]

US Interest Rate Hikes Trample on Developing Countries

Aug 21 20:31

The US Federal Reserve (Fed) stepped up its fight against inflation after consumer prices increased 8.6 per cent in the United States.

On 15 June 2022, the Fed voted to raise the target range for the federal funds rate to 0.75–1 per cent. It plans to implement additional hikes for the rest of 2022. But efforts to reduce inflation by increasing interest rates in the United States could harm the rest of the world.

As interest rates rise in the United States, those who invest in emerging markets to receive higher rates of return may invest in the more appealing US market.

This will result in massive capital inflows to the United States and increased outflows from the developing world. Without proportionally tighter domestic monetary policies, the ensuing rise in borrowing costs will deplete foreign reserves, appreciate the US dollar and result in balance sheet losses for nations with US dollar-denominated net obligations.

Rising US interest rates have the greatest impact on economies with higher macroeconomic vulnerabilities. Between 2019 and 2021, the COVID-19 pandemic caused a sharp rise in public debt in developing economies — on average increasing from 54 per cent to 65 per cent of GDP.

Thirty-eight emerging economies are now in danger of a debt crisis or are currently experiencing one. At least 25 developing economies spend over 20 per cent of government income on servicing foreign public debt.

This is why interest rate hikes in advanced economies could tighten external financial conditions for emerging markets and developing countries.

There is a worrying comparability between today's economy and the economy of the 1970s and early 1980s which was rife with high inflation, slow growth and rising borrowing costs.

In the 1970s, oil exporters benefitting from increasing energy prices used their surpluses to increase funding for debt markets in emerging market economies.

Fed rate hikes in the early 1980s reduced inflation in the United States but drove up global interest rates, causing many emerging economies to default on their debts.

The debt crisis that followed the Volcker shock was distressing for developing nations. The Fed interest rate hike had a devastating effect on Latin America.

The region experienced plummeting GDP and ballooning unemployment and poverty. The subsequent decade was lost to gradual and uneven economic recovery.

The consequences of the Latin American debt crisis were similarly experienced in Africa's heavily indebted nations. The Fed did not pay enough attention to how its choices would affect the rest of the world.

Though today's economic situation has similar origins to that of the 1970s and 1980s, there are some significant distinctions.

Today, oil producers acutely feel the world's reducing dependence on oil. Real oil price increases are smaller than they have been historically.

Policy tightening in response to the economic downturn has also begun sooner than it did in the 1970s and 1980s, especially in certain emerging markets and developing nations.

Unlike the 1970s and the 1980s, there has not been as much time for recycled petrodollars to fuel imbalances in developing and emerging market economies.

Despite these encouraging developments, new risks have emerged. Due to increased exposure to sizeable bilateral creditors and the recent COVID-19 pandemic, public debt has risen and stunted the growth potential of many countries.

While international financial institutions are doing their part to provide debt relief and stop punitive measures like surcharges — additional fees imposed on countries that fail to make debt repayments — there needs to be swift and systematic action on debt resolution.

This must involve collaboration with private creditors and large state creditors like China. Major food and fuel businesses must be prevented from profiteering and speculating.

Special drawing rights (SDRs) — a foreign reserve asset issued by the IMF that can be used for foreign exchange stability in addition to gold or US dollars — must be redistributed to those countries that urgently require them.

A new release of special drawing rights with an equivalent value of US$650 billion is necessary for immediate relief.

The UN Conference on Trade and Development has advocated an alternative way to facilitate fair and orderly debt crisis resolutions. It would involve a multilateral legal framework for restructuring sovereign debt using both public and private creditors.

Interest rate increases in advanced countries will always impact low-income countries. But that does not negate the need to pursue structural reform in low-income countries. Structural reform is the only way to find short and long-term solutions to debt management.

US Interest Rate Hikes Trample on Developing Countries - FastBull

The International Monetary Fund's recent World Economic Outlook report paints a bleak economic future. It has downgraded global growth predictions from 6.1 per cent in 2021 to 3.2 per cent in 2022. While the global economy is still recovering from the COVID-19 pandemic, central banks in advanced...

www.fastbull.com

 

[beijingwalker]

Fed rate hikes in the early 1980s reduced inflation in the United States but drove up global interest rates, causing many emerging economies to default on their debts.

The debt crisis that followed the Volcker shock was distressing for developing nations. The Fed interest rate hike had a devastating effect on Latin America.

The region experienced plummeting GDP and ballooning unemployment and poverty. The subsequent decade was lost to gradual and uneven economic recovery.

The consequences of the Latin American debt crisis were similarly experienced in Africa's heavily indebted nations. The Fed did not pay enough attention to how its choices would affect the rest of the world.

Meeting the ultimate scheme of "debt trap"/

 

[truthseeker2010]

too little to late, the quantitative easing is coming to bite the common americans.

 

[beijingwalker]

As America raises rates, the rest of the world bears the pain​

Sep 21st 2022 | WASHINGTON, DC

In recent weeks, as the Federal Reserve prepared to intensify its fight against inflation, a noose has tightened around the neck of the global economy.

On September 21st the Fed announced a 0.75 percentage-point interest-rate rise, its third in a row. The Fed’s benchmark rate now stands at 3-3.25%, up three percentage points since the start of the year.

While the rise was forecast, the central bank offered a surprise: new projections revealed that rates would probably rise to more than 4.5-4.75% at the end of 2023, higher than expected. The projections also suggested that unemployment would rise by at least 0.7 percentage points before the end of next year.


Markets sagged on the news, piling additional suffering on an already difficult month. Tighter American monetary policy squeezes economic activity almost everywhere else, by stifling risk appetites and pushing up the value of the dollar.

Since the end of August, when Jerome Powell, the Fed chair, gave a speech at a central-banking conference in Wyoming spelling out his determination to whip inflation, financial markets have been battered. The value of the dollar has risen by about 2.5% over the past month alone, and by 16% since the start of the year.

The flow of capital towards America’s fast-rising interest rates is proving increasingly difficult for other economies to handle. Falling currencies mean higher import prices, exacerbating inflation problems and forcing central banks to undertake their own whopping rate-rises. On September 20th the Swedish Riksbank lifted its benchmark rate by a full percentage point; the Bank of England may mirror the Fed’s 0.75 percentage-point rise on September 22nd.

The result of tighter financial conditions and hawkish monetary policy has been an epic rise in global bond yields. In recent days America’s ten-year yield has risen above 3.5%, back to levels last seen in the early 2010s. Over the past month alone, ten-year yields have risen by more than 0.6 percentage points in Germany and South Korea, and by nearly a full percentage point in Britain. After years in which interest rates plumbed historically low levels, falling currencies and soaring yields have come as a shock.

They also pose a threat. South Korea is furiously deploying reserves to prevent a chaotic fall in the won, and its government has expressed interest in reopening a dollar swap line with the Fed. On September 22nd Japan intervened to prop up the yen for the first time since the late 1990s. In Britain, where the government has announced a big spending programme to shield people from energy prices, soaring gilt yields and sinking sterling have observers whispering that the economy may be at risk of losing the market’s confidence.

Even if a market panic is avoided, the steady upward march in the cost of credit will chill private investment and tie the hands of governments which might have spent more to boost their economies. Unfortunately for policymakers elsewhere, the American economy continues to look hale, and its inflation figures are holding up. Mr Powell may thus decide that the Fed has more work to do, leaving the rest of the world to bear the pain. ■

As America raises rates, the rest of the world bears the pain

The Federal Reserve’s latest lift offers little help for the global economy

www.economist.com

 

[Communism]

One also has to take into account that when rates were easy, the rest of the world could get free money almost as easily as the U.S./E.U./Japan could.


We see the results in democratic populist cases like Sri Lanka, Pakistan, etc (nearly endless examples around the world).


Smart countries used the easy money period to advance and kept some dry powder for the harder money period like now.

 

[Turingsage]

Inflation is greatest threat to the livelihood of everyone and the primary monetary tool for bringing inflation down is to continue raising interest rates until inflation comes down to the 2% target.
Will that mean a recession ?
YES
The danger of uncontrolled inflation is far far greater than a short recession to bring the supply and demand in line.
Both the FED and the MPC have been lax in not tackling inflation aggressively.
Now is the time to throttle down by raising interest rates to a level where inflation is moderated.

 

[beijingwalker]

This will bankrupt many poor developing countries, speaking of "debt trap". Now China has to write off many countries debt, with this irresponsible US action, poor countries can never be able to manage to pay off their foreign debt.

 

[MH.Yang]

USA keeps raising interest rates, but China keeps cutting interest rates. The world should thank China.

China's Interbank Overnight Repo Rate Drops Below 1% For First Time Since 2021 - China Banking News

China has just seen one of its key interest rates sink beneath the 1% threshold for the first time since early 2021.

www.chinabankingnews.com

 

[Communism]

This will bankrupt many poor developing countries, speaking of "debt trap".

Inflation is actually the best thing for countries in "debt traps"


The only countries where it doesn't help are economic basket cases that have serious internal problems that are never properly resolved.


Inflation is a boon to debters, and a disaster for creditors.

 

[beijingwalker]

Inflation is actually the best thing for countries in "debt traps"


The only countries where it doesn't help are economic basket cases that have serious internal problems that are never properly resolved.


Inflation is a boon to debters, and a disaster for creditors.

It's not the inflation, it's the rising exchange rate of US dollars due to the fast interest increase.

Bangladesh's foreign debt liability swells as price of dollar shoots up

Bangladesh foreign debt liability has increased as the price of dollars has shot up due to high import cost in the wake of Russia-Ukraine war

en.prothomalo.com

 

[Communism]

It's not the inflation, it's the rising exchange rate of US dollars due to the fast interest increase.

Bangladesh's foreign debt liability swells as price of dollar shoots up

Bangladesh foreign debt liability has increased as the price of dollars has shot up due to high import cost in the wake of Russia-Ukraine war

en.prothomalo.com

As said before, this only hurts countries running profligate money printing.


If they aren't doing that, then their currencies would not be dropping very much.


In bangladesh's case, the problem is that they capped prices and subsidized too many things.