The Federal Reserve is leading a worldwide rush of central bank interest rate hikes that risk tipping the world into recession, the European Union’s top diplomat said as he warned that the union was not fighting its corner of the world.
Joseph Borrellthe high representative of the 27-member bloc, said central banks were forced to follow the Fed’s multiple rate hikes to prevent their currencies from falling against the dollar – likening the US central bank’s influence to Germany’s dominance of European monetary policy before the creation of the euro.
“Everybody has to keep up because otherwise their currency will be [devalued]” Borrell told an audience of EU ambassadors. “Everyone is running to raise interest rates, it will bring us to a global recession.”
The unguarded comments to the Fed came in a wide-ranging speech in which he criticized the European Union for failing to listen to foreign countries and trying to “export” its governance model and standards to others, admitting that the bloc did not preempt Russia’s full-scale invasion of Ukraine despite warnings from Washington.
Borrell’s words on US monetary policy follow the World Bank’s warning last month that rate hikes by multiple central banks could trigger a global downturn in 2023, as it argued that the “degree of synchronicity” by central banks was unlike anything seen in five decades .
His warnings come as World Bank and the IMF are starting a week of joint meetings in Washington, where officials will discuss the many threats to the global economy. The fund is expected to downgrade its global economic forecasts for the fourth quarter in a row.
The Fed is debating whether to deliver a fourth consecutive rate hike of 0.75 percentage points at its November meeting, a move that would raise the federal funds rate to 3.75 percent-4 percent. Over inflation of 10 per centThe European Central Bank has raised its deposit rate by 1.25 percentage points at its last two policy meetings, and markets are pricing in a further increase of 0.75 percentage points on 27 October.
Top Fed officials have recently acknowledged more directly that their campaign to tighten monetary policy – the most aggressive since the early 1980s – risks creating “spillovers” that could endanger weaker economies. But they stress that their main concern remains to bring US inflation under control, suggesting that the global implications of their plans are secondary considerations.
Lael Brainard, vice chairman of the Fed, said on Monday that while the US central bank should continue to raise interest rates, it must do so “deliberately and in a data-driven manner” due to “elevated global economic and financial uncertainty”.
She added that the Fed is “taking into account the knock-on effects of higher interest rates, a stronger dollar and weaker demand from foreign economies” and that liquidity in financial markets – the ease of buying and selling securities – is “a bit fragile”. Last month she highlighted risks for highly indebted emerging markets as borrowing costs rise rapidly.
After the Fed’s most recent policy meeting in September, Chairman Jay Powell also said the central bank was in “fairly regular contact” with its global counterparts. “We are very aware of what is going on in other economies around the world and what that means for us, and vice versa,” he added.
Brainard on Monday
The Fed’s influence on current monetary policy trends mirrored the situation in Europe before the euro, where countries were forced to follow the policy of the German Bundesbank, Borrell said. “You had to do it. Even if it wasn’t the right policy for your internal reasons.”
Borrell, speaking at an annual conference of EU ambassadors, admitted that Brussels was “quite reluctant” to believe US warnings that Russia would invade Ukraine in February and had failed to analyze the actions of Russian President Vladimir Putin .
“We didn’t believe it would happen . . . Nor did we foresee Putin’s capacity to escalate,” he said.
Borrell added that Brussels did not understand what other countries wanted and instead pushed its own ideas on them.
“We think we know better what is in other people’s interests,” he said. “We need to listen more . . . to the rest of the world. We need to have more empathy.
“We are trying to export our model, but we don’t think how others will perceive this,” he added.