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 plummeted as traders digested Britain’s Chancellor Kwasi Kwarteng’s £45 billion tax cut package, Raphael Bostic, chairman of the Atlanta branch of the Federal Reserve, said said the plan “has really increased uncertainty and . . . got people wondering what the trajectory of the economy will 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 implemented its third straight 0.75 percentage point hike last week and announced further major 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 set the bar very high for the Fed to back out of its current monetary policy tightening campaign, which is the most aggressive since 1981.
“Pious hope is no substitute for convincing evidence. So before concluding that inflation has peaked, I will have to see several months of falling month-over-month readings,” she said at an event hosted by the Massachusetts Institute of Technology.
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, especially in addressing supply-side bottlenecks and labor shortages that have helped push up inflation. at 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 — leading to 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.