The Global Monetary Policy Tracker from the Council of Foreign Relation and Benn Steil tells the current story of global monetary tightening. We must go back to 2006-07 to see the same level of central bank tightening and we know what happened less than 2 years later.
While the focus is often on the Fed, other central banks are also fighting inflation through raising rates. Central banks also have to respond to the Fed's action as US inflation is exported to the rest of the world through currency markets. A stronger dollar from higher relative interest rates means that foreign countries must import goods at higher prices or raise their rates to stabilize currencies.
The coordinated reduction in rates from the pandemic shock is now being reversed even with a backdrop of an energy shock. The actions of 2020 which created global inflation is now being reversed regardless of the impact on local or global aggregate demand. Unfortunately, the rate shock will not fully impact the real economy until 2023. At that time, the global economy will not be in a slowdown but in a full recession.
In this correlated but uncoordinated monetary world, rates around the global may move too high as countries try and keep up with their neighbor's monetary policy. A global monetary summit may help to address some of these issues, but it requires a new global monetary order based on mutual support and policy actions. It is not clear that this can be achieved in the current environment. Right now, central banks are behind the curve and fell forced to act with singular focus on inflation not global growth, trade, and common monetary policy.
No comments:
Post a Comment