An extraordinary rise in interest rates risks facing a devastating recession and does nothing to curb searing inflation.
After raising interest rates and shrinking the balance sheet, tightening is bound to have an impact on economic growth and employment.
But without extraordinary measures, the stagflation of the 1970s could return.
So if it really doesn’t help lower a lot of prices in the global economy, what an extraordinary rate hike would actually do is tip the global economy into recession.
An extraordinary rate increase by the Fed would prompt capital inflows from emerging market economies into the U.S. that could lead to debt defaults and other problems in some economies and weigh on global financial markets.
And a big Fed rate hike would put a handful of low – and middle-income economies in fiscal distress, hitting those still reeling from high food and energy prices.
However, most low – and middle-income economies are in a better position to cope with shocks than in the past, so widespread financial instability is unlikely.
