America’s plan to repair its economy will shake up the rest of the world

America’s high interest rate regime is out of step with the rest of the world, which will cause chaos in the stock market and economy.Getty Images; Alyssa Powell/BI

We find ourselves once again at a crucial moment in the global economic recovery. Everything has to go well, otherwise global markets could turn violent.

Over the past four years, the world has been united in its efforts to first alleviate the economic pain caused by the pandemic and then combat the historic surge in inflation that followed. When the pandemic hit, central banks around the world cut rates all the way to zero – just as they did during the financial crisis. Then, as inflation took hold, they began raising rates at a rate not seen in decades. They did all of this in a near-perfect timeframe, ensuring that the markets remained stable and predictable. But today, the world risks falling out of sync.

THE The European Central Bank has started to ease interest rates Thursday, reducing its key rate by 0.25%. The move is not only a sign of confidence that the eurozone is in the final stages of its fight against inflation, but also an indication of concern that the economy needs a boost. little help to keep driving. Investors and economists expect the Federal Reserve to follow suit and lower interest rates. in September. Thus, it is said, central banks around the world will begin their coordinated descent toward a soft landing – a perfect balance between fighting inflation and avoiding a recession.

The fact is that reality has made a mockery of experts’ assumptions throughout the year. Wall Street began the year expecting a slowdown in inflation, a slowing economy and a slower pace of growth, as well as a slowdown in inflation. six interest rates reductions by the Fed. Instead, inflation data has been consistently very good and the strength of the U.S. economy has defied expectations. This combination means there’s a good chance that the September drop Wall Street wants will never materialize.

“The summer will definitely be interesting,” Tamara Basic Vasiljev, a senior economist at Oxford Economics, told me. His base case is that everything will go as planned, but there are caveats: “The Fed has proven its ability to combat any type of financial stability problem. But what will happen if services inflation continues to surprise upwards throughout the summer? It’s becoming obvious that they can’t even cut in September. »

If the Fed does not cut interest rates in the fall, the US high interest rate regime will be out of step with the rest of the world. And any gap between the United States and the rest of the world would send a strange wave of money crashing onto American shores. This sudden influx of liquidity could, in turn, add liquidity to our financial system just as the Fed is trying to dry it up and drive up prices in the economy. This would make it even more difficult for the Fed to ease, further distancing US policy from the rest of the world. Think of it as a vicious cycle that stands in the way of the world’s soft landing.

Over time,…

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