June 18, 2024

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America’s plan to fix its economy is going to screw over the rest of the world

2 min read

America’s high interest-rate regime is out of step with the rest of the world, which is going to cause chaos for the stock market and economy.Getty Images; Alyssa Powell/BI

We are once again at a crucial point in the world’s economic recovery. Everything must go right, or global markets could turn violent.

For the past four years, the world has been unified in its efforts to first ease the economic pain caused by the pandemic and then combat the historic bout of inflation that followed. When the pandemic set in, central banks around the world slashed rates to zero — just as they did during the financial crisis. Then as inflation set in, they started raising rates at a rapid clip unseen in decades. They did all this in nearly perfect time, which ensured that markets remained stable and predictable. But now, the world risks falling out of sync.

The European Central Bank began easing interest rates on Thursday, cutting its benchmark rate by 0.25%. The move is not only a sign of confidence that the eurozone is in the last bouts of its battle with inflation but also an indication of worry that the economy needs a small boost to keep rolling. Investors and economists expect the Federal Reserve to follow suit and cut interest rates in September. And so, the story goes, central banks around the world will begin their coordinated descent into a soft landing — a perfect calibration of that push-pull between fighting inflation and evading a recession.

The thing is, reality has been making a mockery of experts’ assumptions all year long. Wall Street started the year expecting inflation to cool off, the economy to slow to a more leisurely pace of growth, and as many as six interest rate cuts from the Fed. Instead, inflation data has consistently come in hot, and the US economy’s strength has defied expectations. This combination means there’s a good chance that the September cut Wall Street is praying for may never materialize.

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2024-06-09 13:47:01

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