I n recent weeks, as the Federal Reserve prepared to intensify its fight against inflation, a noose has tightened around the neck of the global economy. On September 21st the Fed announced a 0.75 percentage-point interest-rate rise, its third in a row. The Fed’s benchmark rate now stands at 3-3.25%, up three percentage points since the start of the year. While the rise was forecast, the central bank offered a surprise: new projections revealed that rates would probably rise to more than 4.5-4.75% at the end of 2023, higher than expected. The projections also suggested that unemployment would rise by at least 0.7 percentage points before the end of next year.
Markets sagged on the news, piling additional suffering on an already difficult month. Tighter American monetary policy squeezes economic activity almost everywhere else, by stifling risk appetites and pushing up the value of the dollar. Since the end of August, when Jerome Powell, the Fed chair, gave a speech at a central-banking conference in Wyoming spelling out his determination to whip inflation, financial markets have been battered. The value of the dollar has risen by about 2.5% over the past month alone, and by 16% since the start of the year.
The flow of capital towards America’s fast-rising interest rates is proving increasingly difficult for other economies to handle. Falling currencies mean higher import prices, exacerbating inflation problems and forcing central banks to undertake their own whopping rate-rises. On September 20th the Swedish Riksbank lifted its benchmark rate by a full percentage point; the Bank of England may mirror the Fed’s 0.75 percentage-point rise on September 22nd.