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United States
OpinionComment
David Brown
David Brown

Macroscope | By raising interest rates, central banks are playing Russian roulette with the global economy

  • The speed at which global interest rates have risen in the past year suggests central banks are ignoring the fact growth is slowing again
  • Despite US Congress reaching a deal on the debt ceiling, the world could still face a major economic shock if the Fed keeps pressing too hard on inflation

Reading Time:3 minutes
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A man walks by a job advert in the window of a business in Los Angeles on June 6. The recent US Bureau of Labor report showed the public and private sector added 339,000 jobs in May despite the Federal Reserve’s aggressive interest rate increases in an attempt to lower inflation. Photo: EPA-EFE
David Brown
Central banks are supposed to be trusted guardians to promote the right conditions for sustainable growth and financial stability, but are they taking needless risks in their haste to drive down inflation? The undue speed at which global interest rates have been ramped up in the past year suggests they are turning a blind eye to global growth hitting the skids again.
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The euro zone witnessed this first-hand last week, sinking into recession while the European Central Bank (ECB) has carried on regardless with tighter monetary policy. The US Federal Reserve’s decision this week on whether to raise interest rates again could mean the difference between sink or swim for the US recovery in the next few months. In a worst-case scenario, world recession could be on the cards.
Fortunately, the United States has pulled back from the brink after Congress’s recent deal to avert a US government debt default. However, a major economic shock might still come later this year if the Fed keeps pressing too hard on inflation.

The US central bank seems convinced the economy is still running too hot and keeping inflation too high in the process. It is clearly focused on factors such as the robust pace of headline job creation, which saw a bumper 339,000-job gain in non-farm payrolls in May – the highest in four months and way above market forecasts for a monthly rise of 190,000 jobs.

Even though US consumer price inflation has dropped fairly sharply from a 9.1 per cent peak last June to 4.9 per cent in April, it’s still too high for the Fed’s liking. The slow pace of moderation in core inflation – still elevated at 5.5 per cent in April – is causing policymakers most angst, as it is much too high compared to the Fed’s long term inflation goal of 2 per cent.

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