Fed-led rate hike risks triggering 'global recession', warns top EU diplomat

Fed-led rate hike risks triggering ‘global recession’, warns top EU diplomat

The Federal Reserve is leading a global rush to raise central bank rates that risks tipping the world into a recession, the EU’s top diplomat has said, as he warned the union is not fighting his corner of the world.

Josep Borrell, the top representative of the 27-member bloc, said central banks were forced to follow the Fed’s multiple rate hikes to keep their currencies from crashing against the dollar – comparing central bank influence American to Germany’s domination of European monetary policy before the creation of the euro.

“Everyone must follow, because otherwise their currency will be [devalued]“, Borrell told an audience of EU ambassadors. “Everyone is running to raise interest rates, this will lead us to a global recession.”

The reckless comments about the Fed came in a wide-ranging speech in which he criticized the EU for not listening to foreign countries and seeking to “export” its governance model and standards to others, and admitted that the bloc had not anticipated Russia. full-scale invasion of Ukraine despite warnings from Washington.

Borrell’s comments on US monetary policy follow the World Bank’s warning last month that rate hikes by multiple central banks could trigger a global slowdown in 2023, as it said the “degree of synchronicity” central banks was unlike anything seen in five decades.

His warnings come as the World Bank and IMF kick off a week of joint meetings in Washington, where officials will discuss multiple threats to the global economy. The fund is expected to lower its global economic forecast for the fourth consecutive quarter.

The Fed is debating whether to offer a fourth straight 0.75 percentage point hike at its November meeting, a move that would take the federal funds rate to 3.75%-4%. Faced with 10% inflation, the European Central Bank raised its deposit rate by 1.25 percentage points at its last two policy meetings and markets expect a further hike of 0.75 percentage points on October 27.

Senior Fed officials have recently acknowledged more directly that their monetary policy tightening campaign — the most aggressive since the early 1980s — risks creating “spillovers” that could jeopardize weaker economies. But they stress that their main concern remains controlling US inflation, suggesting that the global ramifications of their plans are secondary considerations.

Lael Brainard, vice chair of the Fed, said on Monday that if the U.S. central bank were to continue raising rates, it should do so “deliberately and on the basis of data” due to “elevated global economic and financial uncertainty.” “.

She added that the Fed is “taking into account the fallout from higher interest rates, a stronger dollar and weaker demand from foreign economies” and that financial market liquidity – the ease of buying and sale of securities – is “a little fragile”. Last month, she highlighted the risks posed to highly indebted emerging markets as borrowing costs rise rapidly.

Following the Fed’s last policy meeting in September, Chairman Jay Powell also said the central bank was in “fairly regular contact” with its global counterparts. “We are very aware of what is happening in other economies around the world and what this means for us, and vice versa,” he added.

Brainard on Monday

The Fed’s influence on current monetary policy trends mirrored the situation in Europe before the euro, when countries were forced to follow the policies of the German Bundesbank, Borrell said. “You had to do it. Even if it was the wrong policy for your internal reasons.

Borrell, speaking at an annual conference of EU ambassadors, admitted Brussels was “quite reluctant” to believe US warnings that Russia was going to invade Ukraine in February and failed to analyze the actions of Russian President Vladimir Putin.

“We didn’t think that would happen. . . And we also didn’t foresee Putin’s ability to step up,” he said.

Borrell added that Brussels did not understand what other countries wanted and instead imposed its own ideas on them.

“We think we know best what is in the interests of others,” he said. “We need to listen more. . . to the rest of the world. We need to have more empathy.

“We try to export our model, but we don’t think how others will perceive it,” he added.

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