Fed official warns UK tax cuts raise risk of global recession

Fed official warns UK tax cuts raise risk of global recession
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The UK government’s fiscal plan has increased economic uncertainty and raised the likelihood of a global recession, a senior Federal Reserve official has warned after sterling hit a record low.

Atlanta Fed President Raphael Bostic said while the pound was teetering, traders were looking at British Chancellor Kwasi Kwarting’s 45bn tax cut package.

When asked if the plan and the resulting volatility would increase the likelihood of the global economy sliding into recession, Bostic said “it’s not helping.”

“A fundamental tenet of economics is that more uncertainty leads to less engagement from consumers and businesses,” he said. “The key question will be what this ultimately means for the weakening of the European economy, which is an important consideration for how the US economy will perform.”

Bostic’s comments followed a warning from Susan Collins, president of the Fed’s Boston branch, who said an external shock could push the US economy into recession.

At an event on Monday, Collins, whose term began in July, highlighted the challenges facing the Fed as it confronts price pressures that have spread to a wide range of sectors and have proved much tougher than anticipated .

“A significant economic or geopolitical event could push our economy into recession if politics continues to tighten,” said Collins, who is this year a voting member of the Federal Open Market Committee and the first black woman to chair one of the bank’s branches .

She added: “Furthermore, calibrating policy in these circumstances is complicated by the fact that some effects of monetary policy are lagged.”

Collins and Bostic are among the first senior Fed officials to speak out since the central bank delivered its third straight 0.75 percentage point rate hike last week and announced more large rate hikes.

Most officials expect the federal funds rate to rise to 4.4 percent by the end of the year before peaking at 4.6 percent in 2023. The current rate is between 3 percent and 3.25 percent.

Cleveland Fed President Loretta Mester also addressed the global impact of the Fed’s aggressive monetary tightening campaign, which has resulted in a significant appreciation of the dollar against other currencies.

“We’re going to set monetary policy that’s appropriate for the US economy, but we’re not putting it in a vacuum because we think we’re an independent island and not connected to the rest of the world,” she said a Massachusetts Institute of Technology event on Monday.

With inflation at multi-decade highs, Mester said “this is not the time” to worry about the risks of exaggeration in terms of monetary tightening, and she outlined the very high bar for that Fed to withdraw its plans to slow down the economy.

“Wishful thinking cannot replace compelling evidence. So before I conclude that inflation has peaked, I need to see several months of month-to-month declines in readings,” she said.

Collins, meanwhile, said it was “quite likely that inflation has peaked and may have already peaked”.

However, she noted that the Fed’s tools had some limitations, particularly in terms of easing supply-side constraints and labor shortages that have helped push inflation to its highest level in about four decades.

As with other officials, Collins said the job losses associated with this tightening cycle could be less severe than in the past.

As employers have struggled to find workers – resulting in one of the tightest job markets in decades – most officials believe the unemployment rate will only rise to 4.4 percent from 3.7 percent in the coming years.

“There’s a really good chance that the job losses will be less than in other situations, and I’m betting on that,” Bostic said in an interview with CBS on Sunday.

“We’re going to do everything we can at the Federal Reserve to avoid a deep, deep pain, and I think there are a few scenarios where that’s likely to happen,” he said.

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