The British government’s new budget plan has heightened economic uncertainty and increased the chances of a global recession, a senior US central bank official warned after the pound rose to a record high.
Speaking as the pound soared as traders digested Britain’s Chancellor Kwasi Kwarteng’s £45billion tax cut package, Raphael Bostic, chairman of the Atlanta branch of the Federal Reserve, said said the plan “really increased uncertainty and really made people wonder what the trajectory of the economy is going to be.”
Asked whether the plan and the resulting volatility would increase the chances of the global economy tipping into recession, Bostic said, “It doesn’t help.”
“A fundamental tenet of economics is that more uncertainty leads to less consumer and business engagement,” he said. “The key question will be what it means to ultimately weaken the European economy, which is an important consideration for the performance of the US economy.”
Bostic’s comments followed a warning from Susan Collins, chair of the Boston branch of the Fed, who said an external shock could tip the US economy into a recession.
Speaking at an event on Monday, Collins, whose term began in July, highlighted the challenges facing the Fed as it faces price pressures that have proven much harder to root out. than expected while extending to a wide range of sectors.
“A significant economic or geopolitical event could push our economy into a recession as politics tightens further,” said Collins, who is a voting member of the Federal Open Market Committee this year and the first black woman to lead one of the branches. form the bank.
She added: “Furthermore, calibrating policy under these circumstances will be complicated by the fact that some effects of monetary policy operate with a lag.”
Collins and Bostic are among the first senior Fed officials to make public remarks since the central bank last week implemented its third consecutive rate hike of 0.75 percentage points and announced significant new increases to come.
Most officials see the fed funds rate reaching 4.4% by the end of the year before peaking at 4.6% in 2023. It fluctuates between 3% and 3.25%.
Also on Monday, Cleveland Fed Chair Loretta Mester spoke about the global ramifications of the Fed’s aggressive campaign to tighten monetary policy, which has fueled significant dollar appreciation against currencies around the world.
“We’re going to set monetary policy that’s right for the US economy, but we’re not setting it in a vacuum thinking we’re an independent island and not connected to the rest of the world,” she added. . said at an event hosted by the Massachusetts Institute of Technology.
As inflation hits multi-decade highs, Mester said “now is not the time” to worry about the risks of overdoing it in terms of monetary policy tightening and she raised the bar very high for the Fed to abandon its plans for a slowdown. economy.
“Pious hope cannot substitute for irrefutable evidence. So before concluding that inflation has peaked, I will need to see several months of falling month-over-month readings,” she said.
Collins, meanwhile, said it’s “quite likely that inflation is near its peak and may have peaked already.”
However, she noted that the Fed’s tools have some limitations, particularly in addressing supply-side bottlenecks and labor shortages that have helped push inflation higher. its highest level in about four decades.
Like other officials, Collins thinks the job losses accompanying this round of tightening may be less severe than in the past.
Because employers have struggled to find workers — resulting in one of the tightest labor markets in decades — most officials see the jobless rate rising just 4.4% in the coming years, against 3.7%.
“There’s a very good chance that if we have job losses, it will be smaller than what we’ve seen in other situations, and that’s what I’m betting on,” Bostic said in an interview. with CBS on Sunday.
“We’re going to do everything we can at the Federal Reserve to avoid deep, deep pain, and I think there are scenarios where that’s likely to happen,” he said.