The United Nations recently released a report saying that the current monetary policy set by the U.S. Federal Reserve will lead to a worldwide recession next year. The UN said that if the Fed keeps raising interest rates as fast and as high as it has done in the last four months, the resulting increase in the value of the dollar will push many nations to an inflation rate that will drive them into recession.

At this point, however, the Fed must continue its very aggressive policy and raise interest rates even higher than it is today. In fact, the Fed will likely raise rates 75 basis points in November and another 75 basis points in December—marking five strait 0.75% interest rate hikes. That still may not be high enough to take enough demand out of the economy to reduce inflation to an acceptable level.

That means more rate hikes could continue into next year. Eventually, the inflation rate will fall, but so will total output. The U.S. is already in a recession. Both the first and second quarters of this year saw negative growth in GDP. The third quarter number will be released at the end of October. While most economists are forecasting modest growth in the 1% range, the number could be negative, making this  “full employment” recession even worse.

The UN and the other critics of current Fed policy are correct. Federal Reserve policy will lead to a global recession. But it’s not the current policy that caused the problem, it’s the shockingly irresponsible monetary policy employed last year and early this year.

In early 2021, the economy was growing at a whopping 6% rate, unemployment was falling so quickly that labor shortages were developing, and the Biden administration was about to pass a nearly $2 trillion deficit spending package. Deficit spending the prior year exceeded $3 trillion. All of that points to an overheated economy.

Normally, the Fed would recognize that an overheated economy leads to inflation. Since price stability is the primary goal of monetary policy, the Fed should have acted early last year to cool the economy and eliminate the inflation threat.

This should have been even more obvious to the Fed when it looked at the monthly Consumer Price Index (CPI) numbers for the first four months of 2021. Prior to the pandemic, the CPI averaged about a 0.1% or 0.2% increase per month. In January 2021, the CPI increased 0.3%, then 0.4% in February, 0.6% in March and 0.8% in April.

Yet Fed Chair Jerome Powell and Treasury Secretary Janet Yellen insisted inflation was temporary, caused primarily by supply chain bottlenecks. Once the bottlenecks were eliminated, they said, inflation would fall without any action needed from the Fed.

So, the federal government under the Biden administration continued an expansionary monetary policy by vastly increasing the money supply through its $120 billion monthly purchase of government securities. They also let interest rates stay near zero.

Instead of helping reduce inflation, those actions created more excess demand in the economy, which worsened inflation. The Biden team kept this expansionary monetary policy in place until March of this year, when they finally ended the bond buying program and started to nudge up interest rates. By then, inflation had reached 8.5%. In July, it rose to 9.1%.

The interest rate hikes in March of 25 basis points and in May of 50 basis points did nothing to reduce inflation. Finally in June Fed Chair Powell said that bringing inflation down was now the primary goal of Fed policy and that the central bank would do whatever is necessary to reduce inflation to an acceptable level. That meant many more interest rate hikes.

Why didn’t the Fed take this view last year?

The UN is right. This very aggressive action by the Fed and similar rate hikes from Central Banks in other countries, will lead to a global recession. Unfortunately, at this point, there is little that can be done to avoid it. Interest rates will have to remain high to reduce inflation.

In the meantime, the high interest rates will slow economic growth in the U.S. and cripple growth in many other countries.

It didn’t have to be this way. Had the Fed recognized that its primary goal is price stability and acted early 2021 to stabilize prices, the inflation rate would be about half as high as it is today, and there would be no need for the large rate hikes.

Last year’s shockingly irresponsible monetary policy led to most of today’s inflation. Now the Fed’s aggressive action will lead to a global recession.
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Michael Busler is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.