Experts warn of contagion risks from US monetary policy to other economies

Experts warn of contagion risks from US monetary policy to other economies

Electronic screens display stock market information at the New York Stock Exchange (NYSE) in New York, the United States, May 5, 2022. Photo:Xinhua

Electronic screens display stock information at the New York Stock Exchange (NYSE) in New York, the United States, May 5, 2022. Photo: Xinhua

Electronic screens display stock information at the New York Stock Exchange (NYSE) in New York, the United States, May 5, 2022. Photo: Xinhua

US stocks fell on Friday to end a tumultuous week as the United States raised interest rates in a major change in monetary policy. The United States may find its interest rate hike less effective in curbing inflation, and the risks of contagion from its monetary policy to the international financial market and the global economy should be watched closely, experts have warned. .

After falling more than 1,000 points on Thursday, the Dow Jones Industrial Average lost 0.30% on Friday to 32,899.37, falling for a sixth straight week. The S&P 500 on the same day fell 0.6% to 4,123.34, extending a five-week straight decline. The NASDAQ Composite Index fell 1.40% to 12,144.66, losing 1.54% for the week.

US Federal Reserve (Fed) officials argued on Friday that this week’s interest rate hike was not too late to curb inflation. The Fed on Wednesday announced a half-point increase in its benchmark rate, the biggest rate hike since 2000, as part of its efforts to fight inflation.

Admitting that inflation in the United States is “far too high”, St. Louis Fed President James Bullard argued that the Fed was “not as far behind the curve” to contain the inflation, Reuters reported.

Still, Chinese experts warn that it could be difficult for the Fed to use monetary tightening policies such as interest rate hikes to rein in high inflation, and that their impact on global financial markets and the economy. global economy, especially highly indebted economies, will be severe.

The collapse of the stock market after the rise in US interest rates reflects the fact that the current bubble in the US stock market is not supported by economic fundamentals and that tightening measures such as the rise in interest rates put it at risk, Yu Xiang, a nonresident research fellow at Tsinghua University’s Center for International Security and Strategy, told the Global Times on Saturday.

From extremely loose monetary policy forced to tighten to meet inflation, US monetary policy will cause chaos in international capital flows, posing great risks to international financial markets and other economies, particularly highly indebted countries, Yu noted.

Inflation has deep structural causes. Experts say the effect of the tightening policy is likely to be less effective than US officials have claimed.

The current surge in inflation in the United States is the result of the overlap of several factors, including the previous extremely accommodative monetary policy, supply chain disruptions and the wage and price spiral, which is difficult to solve at present, said Dong Shaopeng, lead researcher. Fellow at the Chongyang Institute of Financial Studies, Renmin University of China.

The most difficult problem to solve is the wage-price spiral, as the COVID-19 pandemic has widened the gap between rich and poor in the United States. Although the United States reported an overall unemployment rate of 3.6%, the unemployment rate for some groups, especially low-income groups, is still relatively high, Yu said.

Behind soaring inflation in the United States lies the risk of economic stagnation, which is an insoluble political dilemma. It is estimated that it will take 3 to 5 years for the United States to emerge from this quagmire. Other economies should be ready to deal with its long-term ripple effects, said Gao Lingyun, an expert at the Chinese Academy of Social Sciences in Beijing.

The United States is making a major change in monetary policy, which will have a long-term impact on the global macroeconomic situation and international capital flows. The process has just begun, and monetary and fiscal authorities in all countries should prepare for a long-term response, rather than just reacting to a single rate hike, Gao noted.

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