Central banks around the globe are losing the battle against inflation, and their response could plunge the global economy into a recession, media reports said.
Last week, the Federal Reserve hiked interest rates by three-quarters of a percentage point — its biggest rate rise since 1994. The Bank of England increased its target rate, too, for the fifth time since December. And the Swiss central bank raised rates for the first time in 15 years.
They’re hardly done. The BoE conceded that inflation would spike near 11 per cent in the fall, and the Fed just increased its inflation expectations for 2022 by a full percentage point. Although Fed Chair Jerome Powell said last week there’s still a chance the US economy could avoid recession, he conceded that Russia’s invasion of Ukraine, the ongoing pandemic and the supply chain and energy crunches “have raised the degree of difficulty and created great challenges … so we just don’t know”, CNN reported.
By pulling back stimulus and putting the monetary policy engine into full reverse, the Fed and other central banks have rattled investors. The US stock market has entered a bear market, and last week was Wall Street’s worst since March 2020: The S&P 500 tumbled nearly 6 per cent, and the Dow plummeted 1,504 points, or about 5 per cent.
US stocks have fallen 23 per cent since hitting a record high January 3. Yet they could have plenty more room to fall — particularly if the efforts to gain control of runaway prices send the economy into a downturn.
“The Fed may be willing to push the economy into a recession to actually get inflation under control,” Anthony Saglimbene, global market strategist at Ameriprise said, CNN reported.
“I think that was probably in the back of investors’ minds, but it’s front and center now. Stocks are going to have a hard time until they figure out where that end point is for the Fed,” he added.
Recessions have not been kind to investors. Bear markets during recessions have historically been longer and deeper than bear markets that weren’t associated with economic downturns, notes Sam Stovall, chief investment strategist at CFRA Research. Since World War II, stocks have fallen 28 per cent in bear markets without recessions — and 36 per cent in those during recessions, CNN reported.