As America raises rates, the rest of the world bears the pain

IN RECENT weeks, as the Federal Reserve prepared to intensify its fight against inflation, a noose has tightened around the global economy. On Sep 21, the Fed delivered a 0.75 percentage point interest rate rise – its third in a row. The Fed’s benchmark rate now stands at 3 to 3.25 per cent, up 3 percentage points since the start of the year. While the rise was anticipated, the central bank offered a surprise: New projections revealed that rates would probably rise to more than 4.5 to 4.75 per cent at the end of 2023, higher than expected. The projections also suggested that unemployment would rise by at least 0.7 percentage points before the end of next year.

Markets reeled on the announcement, piling new suffering on an already very painful month. Tighter American monetary policy squeezes economic activity everywhere else, by stifling risk appetites and pushing up the value of the dollar. Since the end of August, when Jerome Powell, the Fed chair, gave a speech at a central banking conference in Wyoming spelling out his determination to whip inflation, financial markets have been battered. The value of the dollar has risen by about 2.5 per cent over the past month alone, and by 16 per cent since the start of the year.

The flow of capital towards America’s fast-rising interest rates is proving increasingly difficult for other economies to handle. Falling currencies mean higher import prices, exacerbating inflation problems and forcing central banks to undertake their own whopping rate rises. On Sep 20, the Swedish Riksbank lifted its benchmark rate by a full percentage point; the Bank of England is expected to mirror the Fed’s 0.75 percentage point rise on Sep 22.