Fed should cure itself of rate hike addiction

This is an editorial from China Daily.

A drug is "a substance intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease". But if taken to cure all ills, a drug can lead to addiction, which can have "harmful physical, psychological or social effects". We can add "economic and political effects", which the Federal Reserve's addiction with interest rate hikes will have not only on the United States but the rest of the world as well.

The Fed raised the interest rate by 25 basis points on Thursday (Beijing time), the 10th time it has done so since March 2022, justifying its move as being "strongly committed to returning inflation to its 2 percent objective".

True, the 10 rounds of rate hikes have reduced inflation from a peak of 9.1 percent in June 2022 to 5 percent in March this year. But in the US, the rates of credit cards, mortgages and auto loans — already surging since last year — all stand to rise even more, increasing the burden of loan costs for both consumers and businesses. And since banks are offering higher interest rates on savings, people will save more and spend less to earn more interest, which could cause the economy to slow down further, leading to a recession.

Worse, the Fed's rate hikes will cause capital to flow from other countries into the US, dealing another blow to their economies at a time when they are yet to emerge from the impacts of the COVID-19 pandemic and the Ukraine crisis.

The Fed surely knows the interest rate hikes alone cannot bring down inflation or boost the US economy, because there are many reasons behind the high inflation — massive quantitative easing, for one, the Fed pumping in huge amounts of money into the market, for another. During the three years of the pandemic alone, the US' money supply increased by more than 40 percent to peak at $21.7 trillion in April 2022.

The US is trying to restore order to its economy, which fell into disarray due to an overdose of money, by harming other economies. Sticking to its addiction of interest rate hikes to check inflation and boost US growth, the Fed is creating problems for both developed and developing economies.

But why should the US worry about other economies now when it has never done so before?

Maybe the other economies can take solace from the Fed Open Market Committee's statement about taking "into account the cumulative tightening of monetary policy", which has been widely interpreted as implying an end to this round of interest rate hikes.

But given its addiction, the Fed cannot be relied upon.