Fed official warns UK tax cuts increase risk of global recession as sterling tumbles

Raphael Bostic from US central bank’s Atlanta branch warns of ‘uncertainty’ after pound touches record low

The UK government’s new fiscal plan has increased economic uncertainty and raised the odds of a global recession, a top official at the US central bank warned after sterling touched an all-time low.

Speaking while the pound whipsawed as traders digested UK chancellor Kwasi Kwarteng’s £45 billion (€50 billion) tax-cutting package, Raphael Bostic, president of the Atlanta branch of the Federal Reserve, said the plan “has really increased uncertainty and ... caused people to question what the trajectory of the economy is going to be”.

Asked whether the plan and resulting volatility would increase the chances that the world economy tips into recession, Bostic said: “It doesn’t help.”

“A basic tenet of economics is more uncertainty leads to less engagement by consumers and businesses,” he said. “The key question will be, what does this mean for ultimately weakening the European economy, which is an important consideration for how the US economy is going to perform.”

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The Bank of England and UK treasury battled on Monday to calm market turmoil after the pound hit a record low against the dollar. The pound hit an early-morning low of $1.035 against the US currency, with the Bank of England later issuing a statement saying it would “not hesitate to change interest rates” to keep inflation under control.

Bostic’s comments came on the heels of a warning from Susan Collins, president of the Fed’s Boston branch, who said an external shock could tip the US economy into a recession.

Speaking at an event yesterday, Collins, whose tenure began in July, highlighted the challenges facing the Fed as it confronts price pressures that have proven much harder to root out than anticipated while spreading to a broad range of sectors.

“A significant economic or geopolitical event could push our economy into a recession as policy tightens further,” said Collins, who is a voting member on the Federal Open Market Committee (FOMC) this year and the first black woman to lead one of the bank’s branches.

She added: “Moreover, calibrating policy in these circumstances will be complicated by the fact that some effects of monetary policy work with a lag.”

Collins and Bostic are among the first top Fed officials to make public remarks since the central bank last week implemented its third consecutive 0.75 percentage point rate rise and signalled further large increases to come.

Most officials see the federal funds rate rising to 4.4 per cent by year-end before peaking at 4.6 per cent in 2023. It hovers between 3 per cent and 3.25 per cent.

“Actions taken by the FOMC since March, together with the guidance provided in its most recent projections, illustrate policymakers’ resolve to address high inflation expeditiously and prevent it from becoming entrenched in expectations,” Collins said.

In a discussion after her remarks, Collins said it was “quite likely that inflation is near peaking and perhaps may have peaked already”.

However, she noted there were some limitations to the Fed’s tools, particularly with regard to relieving supply-related bottlenecks and labour shortages that have helped push inflation up to its highest level in about four decades.

Like other officials, Collins thinks the jobs losses accompanying this tightening cycle could be less severe than in the past.

Because employers have struggled to find workers — resulting in one of the tightest labour markets in decades — most officials see the unemployment rate rising only as high as 4.4 per cent in the coming years from 3.7 per cent. — Copyright The Financial Times Limited 2022