The US Federal Reserve has made a “mistake” hiking the interest rate by 0.25% amid ongoing financial turmoil, warns Nigel Green, CEO of deVere Group.
On Wednesday, the US central bank moved its benchmark rate to between 5- 5.25%, up from near zero just over a year ago and the highest level in 16 years.
Green warned that the move could push the US into a longer-term recession.
He said: “The Fed failed early on with inflation due to its grand-scale inaction. It was a hugely consequential miscalculation by the world’s most influential central bank. The Fed has now failed again, making another mistake, which could push the world’s largest economy not only into a short-term but a longer-term recession.
“Clearly, this would not only be a huge issue for the US but for the global economy too.”
Green cited the ongoing crisis within the US financial system as a key reason why the Fed should have held off. According to Green, the turmoil from the banking crisis is leading to a drop in bank lending, tightening the credit conditions for households and businesses which will in turn lead to a slowdown in economic activity and hiring.
Green said: “The Fed’s interest rate hiking agenda has tightened financial conditions which, in part, led to the banking crisis, and now the banking crisis itself is going to put the squeeze on financial conditions even more.”
Green also noted the long time lag for monetary policies, with rate hikes estimated to take between 18 months to two years to fully filter into the economy.
Lastly, Green said the bond market is suggesting a long recession due to its inverted yield curve which is typically a sign of impending downturn.
Green said: “It would appear that the central bank is prepared to increase its stranglehold on households and businesses and to “sacrifice parts of the economy” in order to tame inflation.
“The failing Fed has made another mistake. We can only hope now that this is their last rate hike for a while for the good of the real economy and to restore some of their own credibility.”
