The Federal Reserve and other central banks are putting the world at risk of a global recession and prolonged stagnation by raising interest rates to tame inflation, a United Nations agency said on Monday.
The global slump would inflict “worse damage than the financial crisis in 2008 and the COVID-19 shock in 2020, ” said the United Nations Conference on Trade and Development (UNCTAD).
The agency estimated that a percentage point rise in the Fed’s target decreases economic output in other rich countries by half a percentage point. The output in poor countries falls by 0.8 percent over the subsequent three years.
The Federal Reserve has raised its targeted range for overnight borrowing between banks from between zero to 0.25 percent to three to 3.25 percent. The median projection of Fed officials has the rate rising to a range of 4.25 to 4.5 percent by year’s end.
UNCTAD estimated that the Fed hikes already in place will shrink the economic output of poor countries by $360 billion over the next three years.
“Any belief that they will be able to bring down prices by relying on higher interest rates without generating a recession is…an imprudent gamble,” UNCTAD said in a post describing its latest Trade and Development report.
“There’s still time to step back from the edge of recession,” UNCTAD Secretary-General Rebeca Grynspan said. “We have the tools to calm inflation and support all vulnerable groups. This is a matter of policy choices and political will. But the current course of action is hurting the most vulnerable, especially in developing countries and risks tipping the world into a global recession.”
UNCTAD argues that inflation is driven by supply side constraints and therefore that targeting demand with higher interest rates is inappropriate. Instead of interest rate hikes, it calls for price controls on food and energy funded by windfall profit taxes on energy companies.
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