Federal Reserve Policy: Global Impacts
With the most recent New York Federal Reserve’s Survey of Consumer Expectations suggesting that inflation has decelerated since June, numerous leading economists and investors now believe that inflation will unravel faster than previously expected (CNBC 08/08/2022).
The CEO of Ark Investment Management, Cathie Wood, has even gone as far as to suggest that deflation will be the factor that will have the most significant negative economic impact, due to the recent prices of three crucial commodities and economic indicators: gold, copper, and oil.
In a recent conference call with investors and analysts, she went on to highlight that companies have been left with large inventories as a result of declining consumer demand. This will ultimately lead to lower prices in the long term.
The same forecast suggests that a recession is in sight: unemployment claims have increased by more than 50% since March, with household-employment numbers falling by 200,000 in the last four months.
The Federal Reserve repeatedly downplayed the threat of inflation before it was too late, it was repeatedly referred to as ‘transitory’ by the seven-member Board of Governors, a group that determines monetary policy, monitors risk, and regulates financial corporations.
They now plan to raise interest rates significantly before 2024, to ensure that prices stabilise. The current volatility dissuades consumers from purchasing products or services, increasing the likelihood of a steep and prolonged recession.
The Fed believe that they can ensure a ‘soft landing’ (a period of disinflation without recession. However, according to Peter Conti-Brown, a professor at the University of Pennsylvania, ‘we’ve never seen it with inflation as high as it is today, nor with the interest rate hikes as aggressive as the Fed has signalled.’ He also claimed (referring to Federal Reserve policy goals) that ‘we want to bring inflation down as quickly as we can without bringing in a baby depression as a consequence.’
Quantitative easing has been criticised for its potential role in bringing about recent inflation. It was a strategy adopted by central banks to increase money supply during the Covid-19 pandemic. The Federal Reserve used $700 billion in QE spending to address market turmoil in 2020. One of their key inflation management strategies has been to sell off these assets, a clear sign that they acknowledge the inflationary effect that QE has had on its economy. In many cases, there has been an additional side effect: devalued currency, leading to the increased cost of imports and consumer products, directly contributing to the cost-of-living crisis that has plagued many of the world's largest economies.
The Fed’s current aggressive attempts to curb inflation could send shockwaves through developing countries, increasing public debt in countries including Ghana, Kenya, Pakistan and El Salvador, which are also experiencing economic difficulties as a result of the ongoing war in Ukraine. Growth in these emerging markets is crucial, and their development could be delayed by weak public finances and investment.
Looking at the current economic situation in the US as one statistic can be misleading – the potential recession has had an outsized impact on the technology sector, with companies including Google, Meta (formerly Facebook), and Microsoft slowing hiring in light of the uncertainty caused by fiscal policy and volatile forecasts. Not only will this hamper a fast-growing sector that plays a vital role in the American strategy to remain a dominant economic force in the face of competition from China, but it will also starve many of the most capable graduates of the opportunity to gain advanced technical skills, leaving them trailing in the talent wars.
A recession can bring an opportunity for an economic reset – by investing in digital and physical infrastructure, America can once again lead the world in education, growth and opportunity.