By September 22nd, Japan became the only major industrialized economy to hold its interest rate at near zero—and pressure is building for the Bank of Japan to act. Whereas Japan has been hesitant, the Federal Reserve in the United States shows no sign of letting up. At the last September FOMC meeting, the Fed increased the federal funds rate by +75bps and the market is expecting additional hikes culminating in a peak rate of 4.5% by March of next year. 

Central banks delivered about 500bps of rate hikes in the span of one week, which includes a surprise +100bps increase from the Swedish Riksbank. With every other major central bank (and most minor ones) hiking their interest rates, the stock of negative-yielding debt in the Bloomberg Global Agg Index has plummeted from $18.2 trillion in late 2020 to $1.8 trillion currently.  

Against this backdrop, some are beginning to raise the alarm. Former IMF Chief Economist Maurice Obstfeld recently warned that with most central banks tightening monetary policy aggressively and stimulating, they risk overdoing it and triggering a harsh global contraction. “Just as central banks (especially those of the richer countries) misread factors driving inflation when it was rising in 2021, they may be underestimating the speed with which inflation could fall as their economies slow,” says Obstfeld.    

A Bloomberg survey showed a 72% chance of recession for the Eurozone over the next twelve months and a 60% chance for the United Kingdom. In Germany, August PPI was up an astounding 45.8% YoY versus 36.8% expected and 37.2% previous. Despite the threat of a European recession, indicators (such as those seen in Germany) have led markets to expect the European Central Bank to continue increasing rates anywhere from +50bps to +75bps in both October and December.  

In the United States, the Atlanta Federal Reserve Bank’s tracker for 3Q GDP growth has slipped from a healthy 2.5% to a “stall speed” of 0.3%. Further, the August CPI report showed both headline and core inflation remained high year on year. This is significant as “under the hood” measures like median CPI indicate a broad-based acceleration of inflation. The current 9.2% (annualized m/m for median CPI) is the highest since data began in 1983.  

While the global economic landscape has shifted, central banks continue to stay the course and push back against growing recession fears. Perhaps Federal Reserve Chairman Jerome Powell offers the best summation of how they are navigating economic realities. “No one knows whether this process will lead to a recession or, if so, how significant that recession would be…nonetheless, we’re committed to getting inflation back down to 2%, because we think that a failure to restore price stability would mean far greater pain later on,” Powell said. Central bankers cannot ignore inflation and only time can tell whether they are making timely and effective policy decisions.