The Federal Reserve is expected to raise interest rates this week for another three quarters in its effort to tame inflation, further adding to the strength of the rapidly rising dollar in the process.
This is increasingly seen as a problem in Europe, where there are growing concerns about a recession as currencies lose the power of the US dollar.
Europe is also facing economic pressures from Russia’s war on Ukraine, with fears that Russian President Vladimir Putin could use energy as a powerful weapon this winter. Many European countries rely on supplies from Russia to heat homes in winter.
The concern is leading to new complaints from those who see the Fed’s actions as potentially causing more problems than they would recover if seriously affecting Europe.
“It is my real disappointment with what the Fed is doing now. Frankly, global geopolitical economic conditions do not justify 75 basis points,” Claudia Saham, a former Federal Reserve economist and founder of Saham Consulting, told The Hill. Said in an interview with.
“Our monetary policy is crushing Europe and emerging markets. The Fed is almost certainly making the difficulty in Europe worse,” she said.
Rising interest rates make it more expensive to borrow money and make the US dollar more valuable than other currencies.
The euro is down about 12 percent year on year against the dollar, reaching a one-to-one ratio, the weakest level in nearly 20 years. The British pound is down more than 15 percent in the year to its lowest level since the mid-1980s.
The Japanese yen is down 20 percent against the dollar, the Chinese renminbi about 9 percent, the Indian rupee about 7 percent and the Swiss franc about 5 percent.
The changing values of currencies have many real-world effects.
The dollar goes further for American travelers abroad, but it also makes it more expensive for American manufacturers to export goods. It lowers costs for US importers at a time when supply-chain problems related to the coronavirus and high demand emerging from the pandemic have helped fuel inflation.
The international knock-on effect of a stronger dollar is unlikely to top the Fed’s current list of priorities. Getting control of 40 years of high inflation, which was initially misinterpreted by Fed economists and Treasury officials as “temporary” and not a serious cause for concern, is more pressing.
The Fed may also see an artificially strong dollar as a good thing in the short term as it remains favorable to US consumers despite forcing global economies to re-examine their import and export dynamics.
But a major recession in Europe, where even central banks are raising interest rates to fight inflation, is not in the interest of the US, one of Europe’s biggest trading partners.
Domestic producers have also suffered heavily from a stronger dollar and are keen to lower the level of exchange rates in the interest of selling more goods abroad. Further interest rate hikes by the Fed will continue to ease the bottom lines in the US manufacturing sector.
But the Fed is conscious that inflation is vulnerable to higher import costs. Recent research by the New York Fed showed that higher import prices due to back-up supply chains were a major reason behind the rising prices felt by US consumers after the pandemic.
According to a study published in August by the New York Fed’s Liberty Street Economics blog, higher import prices “more than doubled during the Covid period” led to price increases to domestic producers.
Europe is in a particularly difficult position because of the Russo-Ukraine war, which shows no signs of slowing despite progress made by Ukraine in recent weeks.
Facing a barrage of Western sanctions, which now include a price cap on Russian energy exports, Russia has shut down its natural gas supply to Europe at different times in the summer, citing maintenance issues with a major pipeline. Supply stopped.
European officials responded by introducing new energy regulations to bring down “astronomical” electricity prices while shifting their economies away from previously cheap and abundant Russian natural gas.
In the United Kingdom, the government raised its price cap on domestic energy expenditure to 80 percent for October as the country deals with rising energy prices.
British Prime Minister Liz Truss said in a statement on the energy crisis earlier this month, “We are supporting this country through this winter and next, and tackling the root cause of the high prices, so we will again Have never been in this situation.”
Elsewhere in Europe, countries cut their economic growth projections, with Finland slashing its GDP forecast by 2023 to 0.5 percent from a previous estimate of 1.1 percent.
Finland’s economic growth is being hampered by rising prices, the country’s finance ministry said in a statement on Monday.
“Finland’s GDP will grow by 1.7 percent in 2022, although growth will slow significantly by the end of the year. Consumer price growth has accelerated to about 8 percent and will increase by an average of 6.5 percent this year. Rising prices weaken domestic purchasing power. and consumption growth will remain weak in the latter half of the year. Despite employment gains, real household income is declining and there is little left for savings,” the ministry said.
Analysts expect the Fed to continue bullish on inflation with its rate hikes, which now stand at 8.3 percent annually, with core inflation rising to 0.6 percent from July to August.
“America was hit back after this week” [consumer price index]Investors will focus on the Fed’s decision next Thursday, with the market now at at least 75%. solid pricing of [basis point] growth,” analysts at Deutsche Bank wrote in a note last week.
“A lot of attention will be paid to the path and magnitude of future growth of policy makers. 75 to our American economists. are supposed to [basis point] Move on to next week and have recently published … why the terminal rate should approach 5 percent,” he wrote.