After unwarranted trade wars, pandemic depression, proxy wars, energy and food crises, the global economic outlook will be further hurt by aggressive US Federal Reserve hikes and collateral damage worldwide.

In October, inflation in the Philippines jumped to 7.7%, the highest increase in 14 years, according to the Philippine Statistics Authority (PSA) on Friday. The last time consumer price growth was higher was in December 2008, when it reached 8.2%.

Following the latest rate hike by the US Federal Reserve, BSP Governor Felipe Medalla signaled that the central bank rate, currently at 4.25%, could reach 6% by the end of the first quarter of 2023.

Due to the complacency of the US Fed, the rest of the world is footing a large part of the bill.

Minimized risks

Since the start of 2020, the Fed has made two key mistakes. Ignoring WHO warnings about the international spread of Covid-19, it only started lowering rates late in March 2020. The second mistake came after mid-2021, when the inflation began to climb rapidly. Instead of a timely response, Fed Chairman Jerome Powell downplayed the threat of a price spike, calling them “transitional.”

Despite multiple red flags since then, the net effects of rate hikes continue to be underestimated. Last January, I warned that US inflation was the global risk of 2022 (The Manila Times, January 17, 2022). Until then, the Fed had largely ignored the surge in inflation. Due to the late response, I expected the resulting risks to penalize the faltering global recovery.

In February, after the disastrous failure of international diplomacy over Ukraine, I warned that the global recovery is running out of steam and the global economy faces the risk of a stagflationary recession (TMT, February 28, 2022).

During the first week of March, I predicted that the unwarranted proxy war in Ukraine would “severely penalize Ukraine, Russia, the United States and NATO, Europe, developing countries and Europe. ‘world economy’, which would aggravate the threats of energy and food inflation (The World Financial Review, March 9, 2022).

More recently, I predicted that US inflation and aggressive rate hikes are pushing the West into recessionary territory, while collateral damage is derailing development elsewhere, including Southeast Asia and the Philippines ( TMT, September 26, 2022).

Prices not so “transitional”

From early 2020 to early 2021, the federal funds rate was 0.25%. Today, although the inflation rate in the United States has slowed for the third month to 8.2% in September 2022, it remains above market forecasts.

The energy index increased by almost 20%, while the increase in the cost of food (more than 11%) was close to its highest since 1979. In addition, the base rate, which excludes volatile foods and energy, rose to 6.6%, the highest since August. of 1982, and above market expectations. In short, inflationary pressures remain elevated (see chart).

Inflation and interest rates in the United States

Recently, the Fed raised the rate from 3.75% to 4%. It was the sixth straight rise and the fourth consecutive three-quarter point increase, pushing borrowing costs to a new high since 2008.

As if the Fed’s monetary pain weren’t enough, the White House’s foreign policy favors runaway inflation and heightened uncertainty. The net effect has been the deadly mix of a global energy crisis and what UN Secretary General Antonio Guterres has called “the collapse of the global food system”.

As aggressive rate hikes continue to push the US, UK and Europe into a stagflationary recession, peace talks are sidestepped in Ukraine while war rhetoric wins in Taiwan and several others” international hotspots.

Indeed, rapid and proactive diplomacy has not been the goal in Ukraine. Instead, as US Secretary of Defense Lloyd Austin acknowledged in late April: “We want to see Russia weakened.” Today, it seems that the effective strategic objective is to undermine the Chinese economy, even at the expense of Chinese, Asian and global economic prospects.

The Fed’s rampage towards 5%

As I predicted a month ago (TMT, September 26, 2022), the Fed was planning another 75 point hike, followed by another 50 point hike. This would bring the year-end rate to 4.5%.

And then ? As markets hoped for a lower rise in December, Fed Chairman Powell noted that the ultimate level of interest rates would be higher than expected.

Assuming yet another 50 point hike in Q1 2023, the Fed appears to be aiming for a 5% rate. But will it turn out to be “terminal”?

Trade wars, de-globalization, and unwarranted conflict tend to fuel inflation. Will their impact really diminish by March 31, 2023? And what about energy and food inflation, and new pandemic variants?

If the assumptions are wrong, corrections ensue in the markets.

An inclusive monetary system

Aggressive rate hikes are predicated on greater unemployment and income polarization in America and around the world. It’s the déjà vu of the 1980s again, but with years lost in many advanced and emerging economies, and decades lost in developing countries. The difference is that today’s international environment is much more dire.

This is what happens when the monetary policy of a single major country dominates the global economic outlook. Indeed, 332 million people dictate the future of 8 billion people. It is a system mired in conflicts of interest and a system that promotes undue suffering around the world.

What we need is a monetary system that prioritizes peace and stability, full employment and stable prices – an inclusive system that resembles the global population it is meant to serve .

Dr. Dan Steinbock is an internationally recognized strategist in the multipolar world and the founder of Difference Group. He has worked at the India, China and America Institute (USA), the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). Learn more at https://www.differencegroup.net