Fed Chair Jerome Powell speaks at a press conference

U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C. on July 27, 2022. (Photo: Liu Jie/Xinhua via Getty Images)

Fears of 'Devastating' Global Recession Grow as Central Banks Continue Rate-Hiking Frenzy

"Central bankers are supposed to be looking out for the economy as a whole," wrote one observer. "But at the end of the day, they have the mentality of bankers, protecting creditors."

Synchronous interest rate hikes imposed by the world's most powerful central banks in recent months have triggered mounting concerns of a global recession that could plunge millions more into poverty, spark a surge in joblessness, and heighten economic pain for poor nations in particular.

The latest warning comes from the World Bank, which published a study late last week warning that central banks' efforts to tame inflation by aggressively hiking interest rates--thereby increasing borrowing costs and tamping down demand--could cause a significant global economic contraction without bringing inflation back down to the pre-pandemic average.

"A dangerous contagion is spreading from the U.S. Federal Reserve to the European Central Bank and the rest of the world."

Under a scenario of persistently high inflation, the World Bank notes, the U.S. Federal Reserve, the European Central Bank, the Bank of England, and other central banks would likely continue raising interest rates, further slowing a global economy that is already "in its steepest slowdown following a post-recession recovery since 1970."

"If the degree of global monetary policy tightening currently anticipated by markets is not enough to lower inflation to targets, experience from past global recessions suggests that the requisite additional tightening could give rise to significant financial stress and trigger a global recession in 2023," the study cautions. "This would entail a recession in advanced economies within the range of the contractions that occurred in the past five global recessions."

"A global recession would also translate into a sharp decline in growth in [emerging market and developing economies]," the study adds. "In light of elevated vulnerabilities in many of these economies, they would face severe challenges associated with financial stress."

David Malpass, the president of the World Bank, said in a statement that "global growth is slowing sharply, with further slowing likely as more countries fall into recession."

"My deep concern is that these trends will persist, with long-lasting consequences that are devastating for people in emerging market and developing economies," said Malpass. "To achieve low inflation rates, currency stability, and faster growth, policymakers could shift their focus from reducing consumption to boosting production. Policies should seek to generate additional investment and improve productivity and capital allocation, which are critical for growth and poverty reduction."

The World Bank's warning came just days ahead of the U.S. Federal Reserve's latest policy meeting this week, when it is expected to announce its third 75-basis-point interest rate hike of the year following worse-than-expected Consumer Price Index data. Prior to 2022, the last time the Fed raised its benchmark rate by 75 basis points was in 1994.

Progressive economists and lawmakers in the U.S. have been warning for months that the Fed is flirting with economic disaster by quickly hiking interest rates in an attempt to fight an inflation surge driven in large part by pandemic- and war-induced supply chain disruptions and corporate profiteering--neither of which will be directly mitigated by rate increases.

"Powerful businesses are using the cover of inflation to increase their prices higher than their actual costs are rising," Robert Reich, the former head of the U.S. Labor Department, argued on Twitter Monday. "Repeat after me: Wages and costs of production aren't pushing up prices."

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Bolstering outside criticism of the Fed's approach, a study authored by one of the U.S. central bank's own economists and quietly published in July warned that "strong (tight) labor markets can become weak (slack) faster than policymakers may anticipate."

"Indeed, our results demonstrate that labor demand reacted sharply and quickly to the tightening of monetary policy [in the past], at a speed which can outpace policymakers' abilities to track current economic conditions," potentially resulting in a "severe recession," the study authors wrote.

But during remarks at a symposium in Jackson Hole, Wyoming last month, Fed Chair Jerome Powell said openly that "pain" is ahead for U.S. households and businesses, an indication that the central bank has no plans to stop the rate hikes anytime soon--a decision whose impacts will reverberate worldwide.

"A dangerous contagion is spreading from the U.S. Federal Reserve to the European Central Bank and the rest of the world," The American Prospect's Robert Kuttner wrote in a column Monday. "All this depresses economic activity, which is precisely the Fed's intention. As an even more dangerous side effect, the higher U.S. rates have pushed the dollar to its highest exchange value against other currencies in decades, as investors move their money into dollar assets."

"Countries with debt denominated in dollars face higher interest costs on their debt, and the principal amount of the debt also increases," Kuttner added. "Central bankers are supposed to be looking out for the economy as a whole. But at the end of the day, they have the mentality of bankers, protecting creditors. The project of democratizing central banking is a never-ending challenge."

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