US faces ‘larger-than-usual’ risks in inflation battle, OECD says

THE United States faces increased uncertainty due to rapid rises in interest rates, and the Federal Reserve (Fed) should adjust policy as needed as it monitors global events and the impact of its actions on the domestic economy, the Organisation for Economic Cooperation and Development (OECD) said on Wednesday (Oct 12).

“Risks and uncertainties are larger than usual and tilted to the downside,” the OECD said in a survey of the world’s largest economy conducted every two years. It forecast the US economy would grow 1.5 per cent this year and 0.5 per cent in 2023.

“Inflation may prove surprisingly persistent, prompting more aggressive tightening of monetary policy,” the Paris-based intergovernmental organisation said. “Further disturbances to global markets in response to the war in Ukraine or other factors could also have a substantial negative impact on real GDP growth and cause even higher inflation.”

On the flip side, there is still the possibility that a recent easing in supply constraints and commodity prices could contribute to a faster moderation of inflation than projected, the OECD said.

Central banks around the world are battling to rein in stubbornly high inflation, triggered initially by supply constraints for goods caused by the Covid-19 pandemic and fuelled by heavy fiscal stimulus, the impact of Russia’s invasion of Ukraine on energy and food prices, global drought and periodic Covid-19 lockdowns in China.

The Fed has raised its benchmark policy rate from the near-zero level at the beginning of this year to the current range of 3.00 per cent to 3.25 per cent and has warned of pain ahead for the US economy as it tries to bring inflation back down to its 2 per cent goal without causing a recession. The Fed’s preferred measure of inflation is more than three times that target.

Fed policymakers have indicated the policy rate will likely rise to between 4.50 per cent and 4.75 per cent by early next year, although Fed vice-chair Lael Brainard indicated on Monday that the US central bank’s path is not set in stone as it weighs the impact of its actions.

There is rising concern among investors that the speed of Fed rate increases is stressing the global economy and outrunning the central bank’s ability to monitor the effect it is having.

The International Monetary Fund on Tuesday cut its global growth forecast for 2023 and forecast that a third of the world economy will likely contract by next year. It sees US growth at 1.6 per cent this year and 1.0 per cent in 2023.

In its report, the OECD noted that inflation is posing “significant challenges” in the United States, given that it has broadened in scope from goods to services, keeping the Fed on an aggressive tightening path for now.

“Nonetheless, considerable flexibility is warranted and policy deliberations will benefit from careful monitoring of the impact,” of the global factors driving up inflation, the OECD said, as well as “the tightening of financial conditions on the economy.” REUTERS