Fed-led dash for higher rates risks ‘world recession’, warns top EU diplomat

The Federal Reserve is leading a worldwide rush of central bank rate rises that risks tipping the world into a recession, the EU’s top diplomat said, as he warned the union is not fighting its corner in the world.

Josep Borrell, the high representative of the 27-member bloc, said central banks were being forced to follow the Fed’s multiple rate rises to prevent their currencies from slumping against the dollar — comparing the US central bank’s influence to Germany’s dominance of European monetary policy before the creation 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 comments on the Fed came in a wide-ranging speech in which he criticised the EU for failing to listen to foreign countries and seeking to “export” its governance model and standards on to others, and admitted that the bloc failed to anticipate 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 rises by multiple central banks could trigger a global downturn in 2023, as it argued the “degree of synchronicity” by central banks was unlike anything seen in five decades.

His warnings come as the World Bank and IMF kick off a week of joint meetings in Washington, where officials will discuss the multiple threats to the global economy. The fund is expected to downgrade its global economic forecasts for the fourth consecutive quarter.

The Fed is debating whether to deliver a fourth consecutive 0.75 percentage point interest rate increase at its meeting in November, a move that would lift the federal funds rate to 3.75 per cent-4 per cent. Facing inflation of 10 per cent, the 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 0.75 percentage point rise on October 27.

Top Fed officials have recently more directly acknowledged that their campaign to tighten monetary policy — the most aggressive since the early 1980s — risks creating “spillovers” that could imperil weaker economies. But they underscore that their chief concern remains bringing US inflation under control, suggesting that the global ramifications of their plans are secondary considerations.

Lael Brainard, vice-chair of the Fed, on Monday said that while the US central bank should continue raising rates it must do so “deliberately and in a data-dependent manner” due to “elevated global economic and financial uncertainty”.

She added that the Fed “takes into account the spillovers of higher interest rates, a stronger dollar, and weaker demand from foreign economies” and that financial market liquidity — the ease of buying and selling securities — is “a little fragile”. Last month she highlighted the risks posed to highly indebted emerging markets as borrowing costs rapidly rise.

Following the Fed’s most recent policy meeting in September, chair Jay Powell also said the central bank was in “pretty regular contact” with its global counterparts. “We are very aware of what’s 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 over current monetary policy trends mirrored the situation in Europe before the euro, when countries were forced to follow the policies of Germany’s Bundesbank, said Borrell. “You had to do it. Even if it was not 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 was going to invade Ukraine in February and had failed to analyse Russian president Vladimir Putin’s actions.

“We didn’t believe it will happen . . . And we haven’t foreseen neither the capacity of Putin to escalate,” he said.

Borrell added Brussels failed to understand what other countries wanted, and instead pushed its own ideas on them.

“We think that we know better what is in other people’s interests,” he said. “We have to listen more . . . to the rest of the world. We need to have more empathy.

“We try to export our model, but we don’t think how others will perceive this,” he added.

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