A top EU diplomat has cautioned that the union is not defending its interests abroad and that the Federal Reserve is driving a global wave of central bank rate increases that run the risk of sending the world into recession.
Josep Borrell, a high-ranking official of the 27-member bloc, claimed that central banks were compelled to follow the Fed’s repeated rate increases in order to prevent their currencies from falling against the dollar. He compared the US central bank’s influence to Germany’s hegemony over European monetary policy prior to the introduction of the euro.
“Everybody has to follow, because otherwise their currency will be [devalued],” Borrell said to an audience of EU ambassadors. “Everybody is running to increase interest rates, this will bring us to a world recession.”
The unguarded remarks on the Fed were part of a lengthy speech in which he criticised the EU for failing to listen to other nations and for trying to “export” its governance model and standards. He also acknowledged that the bloc had ignored warnings from Washington and had failed to foresee Russia’s full-scale invasion of Ukraine.
Borrell’s comments on US monetary policy come after a warning from the World Bank last month that rate increases by several central banks could start a global recession in 2023. The World Bank claimed that the “degree of synchronicity” among central banks was unprecedented in the previous fifty years.
His cautions come as the World Bank and IMF begin a week of joint meetings in Washington, where representatives will talk about the various dangers to the world economy. For the fourth straight quarter, the fund’s predictions for the world economy are likely to be slashed.
At its meeting in November, the Fed will consider raising interest rates for a fourth time in a row by 0.75 percentage points, which would bring the federal funds rate up to 3.75–4%. The European Central Bank hiked its deposit rate by 1.25 percentage points at its most recent two policy meetings in response to inflation of 10%, and markets are pricing in an additional 0.75 percentage point increase on October 27.
Recent months have seen top Fed officials increasingly openly admit that their campaign to tighten monetary policy, which is the most aggressive since the early 1980s, runs the risk of having “spillovers” that could endanger weaker economies. However, they stress that getting US inflation under control continues to be their top priority, implying that the effects of their plans on the rest of the world are only incidental considerations.
The Fed’s vice-chair, Lael Brainard, stated on Monday that the rising global economic and financial uncertainties required the US central bank to raise rates “deliberately and in a data-dependent manner.”
She noted that the ease of buying and selling securities on the financial market is “a little fragile” and that the Fed “takes into account the spillovers of higher interest rates, a stronger dollar, and weaker demand from foreign economies.” She emphasised the dangers to highly indebted emerging nations last month as borrowing costs quickly increased.
The Fed’s chairman Jay Powell also stated that the institution was in “pretty regular contact” with its international colleagues following the Fed’s most recent policy meeting in September. “We are very aware of what is happening in other economies across the world and what it means for our economy, as well as the reverse,” he continued.
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