UN agency wants Fed to slow interest rate hikes

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By Nicole Goodkind, CNN Business

The Federal Reserve’s aggressive tightening policy has led the US dollar to appreciate to multi-decade highs, crushing currencies around the world.

Now a United Nations agency is warning that its actions, along with those of other central banks, risk pushing the global economy into recession.

What is happening: In a new reportthe United Nations Conference on Trade Development (UNCTAD) has said that a tightening of monetary policy, intended to fight inflation, could inflict worse damage globally than the 2008 financial crisis and the Covid-19 shock in 2020.

The agency estimated in its report that every one percentage point increase in Fed pressure to raise interest rates would reduce the economic output of other wealthy countries by 0.5% and the economic output of less wealthy countries. developed by 0.8% over three years. Indeed, a strong dollar makes it more expensive for other countries to import essentials like food and fuel. A high greenback particularly crushes the poorest countries which must honor their debts in dollars.

Interest rate hikes in the United States this year alone could shave $360 billion off future incomes in developing countries by pushing up the value of the U.S. dollar, according to the UN report.

The UN agency called the Fed’s actions a “reckless gamble” with the lives of the less fortunate. If central banks do not “correct their course”, the UN agency said, emerging countries could slide into a series of debt crises and health and climate emergencies.

A growing consensus: The UN agency joins a growing chorus of organizations expressing concern over the global economic climate.

World Bank President David Malpass Last week warned that a “perfect storm” of global stagflation and recession could reverse years of economic development. World Trade Organization Director General Ngozi Okonjo-Iweala also said last week that the world was “sinking” into recession.

The International Monetary Fund recently revised its economic projections downwards for 2023 and the Indian central bank said friday that the global economy was being shocked by monetary policy.

An alternative to rate hikes: There are several ways to reduce inflation rates, said UNCTAD Secretary-General Rebeca Grynspan. For example, countries could introduce a windfall tax – a one-time levy on an industry that has recorded unusually high profits – on oil and gas companies.

“There is still time to step back from the brink of recession,” she said.

EU governments have already agreed to tax the windfall profits of oil and gas companiesbut the US Congress is extremely unlikely to approve new taxes before the midterm elections in November.

The bottom line: The UN report is unlikely to change the minds of central bankers. Federal Reserve Vice Chairman Lael Brainard said last week that if a higher US dollar puts inflationary pressures around the world, pulling out of the fight against inflation prematurely would have worse consequences.

Central banks and economists believe that “if left unchecked, these inflationary pressures could prove extremely destructive to global growth and welfare,” Eurasia Group Chief Economist Robert Khan told me.

Credit Suisse stress shows investors are nervous

Shares of Credit Suisse plunged to a new all-time high on Monday, before recovering as nervous investors turned their attention to the Swiss bank, reports my colleague Julia Horowitz.

The cost of insuring Credit Suisse’s debt against defaults, as measured by credit default swaps, has also risen, fueling concerns about the bank’s ability to stay afloat.

The lender was plagued by a series of scandals and the regulatory failures of recent years which it cost billions and led to an overhaul of top management. But it is under scrutiny following a memo to employees from CEO Ulrich Körner sent on Friday that was shared with CNN Business.

Körner sought to reassure colleagues about the bank’s financial health before unveiling a restructuring plan at the end of this month.

“I know it’s not easy to stay focused among the many stories you read in the media – especially given the many factually inaccurate statements being made,” Körner wrote. “Having said that, I hope you don’t confuse our daily share price performance with the bank’s strong capital base and liquidity position.”

The bank stressed that it remained on solid ground. But if customers become anxious and start withdrawing their money, it can create a damaging feedback loop.

There are also fears that the collapse of a major bank could spread, much as the collapse of Lehman Brothers in September 2008 precipitated the global financial crisis.

Citigroup analyst Keith Horowitz wrote in a note that he had received inquiries about “the impact of the contagion” on US banks, but said he saw no reason to question it. worry. “We think US bank stocks are very attractive here,” Horowitz said.

U.S. banks hold far more capital than they did when Lehman collapsed, he said. “We understand the nature of the concerns, but the current situation has been night and day since 2007.”

UK government flip-flops on tax cuts

The UK government reverses plans to scrap the top income tax rate, announcing the embarrassing retirement after a rebellion among its own lawmakers and a week of financial and economic turbulencereport my colleagues Mark Thompson and Adam Renton.

In a statement on Monday, Finance Minister Kwasi Kwarteng said the tax cut for people earning over £150,000 ($170,000) ‘has become a distraction’ from the government’s wider package. to tackle the energy crisis and cut taxes more broadly, in its efforts to end years of economic torpor.

“We understand and we have listened,” he said.

The announcement marks a major and abrupt step back for new Premier Liz Trusswhose government was stunned by the reaction to its sweeping tax cuts proposal, which included reducing the top income tax rate from 45% to 40%.

The cuts have caused the pound to plunge to historic lows against the US dollar, and wreaked havoc on the UK debt market as they will require a large increase in government borrowing. Mortgage rates soared and some pension funds struggled to stay solvent.

A certain order was only restored by an emergency intervention last Wednesday by the bank of englandwho said he would buy UK government bonds worth £65 billion ($73 billion).

Next

The Bureau of Labor Statistics releases US Job Openings and Labor Force Turnover (JOLTS) at 10 a.m. ET.

Coming tomorrow: OPEC+ is meeting to discuss energy markets and may agree to cut production due to the recent drop in oil prices. OPEC is responsible for almost 40% of the world’s oil supply.

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