September consumer inflation data highlighted an inconvenient truth for the global economy: the Fed’s aggressive rate hikes are not seemingly taking a big enough dent out of the rapid inflationary environment. U.S. September CPI data increased by 0.4% to an annual rate of 8.2%. Economists polled expected a September increase of 0.3%.
Despite the Federal Reserve’s five-straight rate increases in 2022, which has brought the federal funds rate to a range of 3% to 3.25%, the latest inflation data seems to suggest that more “jumbo” rate hikes are on the way for November, and December.
The FOMC minutes from the September meeting highlighted Fed officials’ firm stance on continuing to raise interest rates at an aggressive pace until inflation is under control. Furthermore, the higher rates are seen as likely staying in place for some time.
“Participants judged that the Committee needed to move to, and then maintain, a more restrictive policy stance to meet the Committee’s legislative mandate to promote maximum employment and price stability,” the meeting summary stated.
Rapid Rate Hikes Spell Trouble for U.S. Debt, Emerging Markets, and Global Stock Markets
Consumers have been feeling the pinch of higher inflation for most of 2022, as the prices of everything from basic groceries to gasoline and vacations, continue to get more expensive. American consumers have largely not made any major changes to their lifestyles despite the higher prices.
However, the result has led to ballooning consumer credit card debt, which is also getting more expensive as Fed rate hikes increase the credit card’s interest rate. As of the end of the second quarter of 2022, U.S. credit card debt stood at a massive $887 billion. This was a $46 billion increase compared to just the end of the first quarter of 2022.
The U.S. government is also at risk due to rapidly rising interest rates. At the current rate, interest on the U.S. national debt is estimated to become one of the largest annual expenses by adding $1 trillion in interest expense per year. This comes as the U.S. national debt just recently surpassed $31 trillion.
Emerging and developed nations continue to face an even more daunting uphill battle as a decades-high strong U.S. dollar is devaluing global currencies at an astonishing rate. The strong dollar has already led to several central bank interventions, most notably in Japan and the United Kingdom. Judging by the current trajectory of interest rates and the U.S. dollar’s underlying strength, it is likely more central banks will be forced to prop up their respective markets as well, particularly as we enter 2023.
Global stock markets have continued to rack up losses throughout 2022. As of this writing, 22 global stock indexes have year-to-date losses of 20% or more. The U.S. Nasdaq is the world’s third worst performer so far in 2022 with a return of -33.42%.
Overall, it appears global economic pain will only continue for the foreseeable future. The Federal Reserve is committed to bringing down inflation through aggressive rate hikes. Unfortunately, they risk bringing down the entire global economy along with it, as the world’s GDP growth is expected to slow in 2023, according to the IMF. At some point, we could see a highly-anticipated Fed pivot and the beginning of rate cuts, but it will likely be too late at that point. The Fed seems determined to continue its rate hikes and seemingly only a major event like a “Lehman-like” bank failure could cause them to change their policy stance.
