Nations move to tackle inflation, increasing risk to global economy

WASHINGTON — The Federal Reserve’s bid to calm inflation by raising interest rates and withdrawing emergency stimulus programs is gearing up just as the global economy is displaying worrisome signs of weakness, aggravated by the war in Ukraine and COVID’s continuing hold on industrial supply chains.

The risk, some economists said, is that the Fed and other central banks that are implementing similar anti-inflation policies may adjust too slowly to a complex and fast-changing global landscape.

While the Fed is just starting to overhaul the loose monetary stance it adopted during the pandemic, global financial conditions already are tighter than at any time since the 2008 financial crisis, according to a Goldman Sachs index.

Faced with tighter money, war in Europe and fresh supply chain troubles in Asia, global growth may buckle. The Institute of International Finance, an industry group, said Thursday that it expects global output to “flatline” this year.

In April, Germany’s closely watched Ifo gauge showed business expectations at their lowest level since the first months of the pandemic. Some analysts predict that Beijing’s harsh COVID lockdowns will cause China’s economy to shrink in the second quarter. And the price of copper, a key industrial metal, has sagged 15% since mid-April.

“There’s just a lot of evidence accumulating that the global economy is slowing quite significantly,” said Jens Nordvig, chief executive of Exante Data. “It’s not just stocks. It’s fundamental commodities linked to real activity.”

The Fed was late in responding to inflation, which accelerated in the second half of last year. But recent decisions in Washington, London and Frankfurt mark a decisive shift in the global economic climate.

To support the pandemic-ravaged economy, Fed Chair Jerome Powell and several of his counterparts two years ago reprised the innovative monetary policies introduced after the 2008 financial crisis. They held interest rates near zero for several years and bought large quantities of government and mortgage-backed securities in an unusual intervention in financial markets aimed at spurring growth.

Now, faced with the highest inflation in decades, central bankers are changing course. The end of the easy-money era has caused investors to reevaluate what stocks, bonds, commodities and currencies are worth, and that is buffeting a global economy already weathering war and disease.

The result is an unusually demanding environment with little margin for error. Powell acknowledged the challenge last month, saying the various forces weighing on the economy today “are really different from anything people have seen in 40 years.”

Indeed, Jamie Dimon warned investors on Wednesday to prepare for an economic “hurricane” as the economy struggles against an unprecedented combination of challenges, including tightening monetary policy and Russia’s invasion of Ukraine.

“That hurricane is right out there down the road coming our way,” the JPMorgan Chase chief executive officer said at a conference sponsored by AllianceBernstein Holdings, Bloomberg News reported. “We don’t know if it’s a minor one or Superstorm Sandy. You better brace yourself.” The bank’s shares fell 1.75% or $2.32 to close at $129.91.

Still, demand for workers remained near record highs, with 11.4 million job openings in April, as the tight labor market continues to be a bright spot for the U.S. economy.

About 4.4 million Americans quit or changed jobs that month, according to a report released Wednesday by the Bureau of Labor Statistics, using their leverage in an economy where job openings still outnumber job seekers by close to 2-1.

Employers reported hiring 6.6 million people in April. Layoffs, meanwhile, fell to an all-time low of 1.2 million, as businesses sought to keep the workers they did have.

In addition, Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania, told CNBC that he doesn’t expect a recession this year and thinks the stock market is close to its bottom.

Since late last year, when the Fed began signaling a tougher anti-inflation stance, global stocks have lost more than $22 trillion in value, according to a Bloomberg index. Investment-grade corporate bonds — those issued by blue-chip companies such as Home Depot or Toyota — have fallen 13% this year. The dollar, meanwhile, has soared, nearing a two-decade high while bitcoin has crumbled to less than half what it was worth in early November.

“This is a very dramatic change. We’re returning to a more normal environment, which may not seem very normal to many, because we’ve been mired in this ultra-low-rate, experimental monetary policy for so long,” said Kristina Hooper, chief global market strategist for Invesco. “The adjustment period can be quite painful and ugly.”

The Fed last month raised its benchmark lending rate by half a percentage point — its largest such move in 22 years — and said it would begin unwinding its $9 trillion stockpile of bonds in June.

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Some economists worry that — after being late to tackle inflation — the Fed now risks hitting the brakes too hard at a time when the global economy looks weaker than it did just a few weeks ago.

“The speed of the move in this global context makes me quite worried,” said Robin Brooks, chief economist for the Institute of International Finance. “...The situation here is super fluid. We have so many sources of instability in the global economy at the moment.”

Just the anticipation of Fed rate increases sent mortgage rates climbing late last year. Rates on 30-year mortgages were below 3% as recently as August, supporting both home-buying and a surge in loan refinancings that gave consumers more spending power.

Now, mortgage rates exceed 5.5% for the first time since 2008, according to Bankrate. Those higher rates helped drive the number of home loan refinancings in the first quarter down 45% from the same period last year.

After spending most of 2021 insisting that inflation would prove temporary, the Fed appears to have plenty of tightening ahead of it. But even as he races to catch up with rising prices, Powell insists that U.S. growth prospects remain “solid.”

A strong labor market, with roughly two job openings for each jobless worker, and steady business and consumer spending mean that nothing “suggests that [the U.S. economy is] close to or vulnerable to a recession,” he said at a May 4 news conference.

“The global economy is probably more vulnerable and more exposed to a range of shocks than the U.S. economy is,” said Nathan Sheets, global chief economist for Citigroup.