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The minutes of the last FOMC meeting suggest that Fed members are prepared to raise rates more aggressively to address rising inflation. As for the balance of QT, they agreed that it would be prudent to limit sales of government bonds to about $60 billion per month and mortgage-backed securities to about $35 billion per month.
The only concern is that tightening monetary policy could cause instability in bond and commodity markets. Continuing the risk theme, the term “inflation” is mentioned 60 times in the minutes. It appears that the Fed fears that events in Ukraine and the shutdowns in China could exacerbate inflation.
As for the outlook, the personal consumption expenditures price index is expected to rise by 4.3% in 2022, before slowing to 2.5% next year. Moody’s, on the other hand, has highlighted seven risks for the G20 economies in 2022-2023. These include the escalating conflict in Ukraine, supply chain disruptions due to shutdowns in China, and the likelihood of new waves of coronaviruses.
On the geopolitical side, broader sanctions on oil and gas could lead to a sharp rise in global mineral and food prices, negatively affecting household purchasing power. In a worst-case scenario, Europe will face a recession. As a result, economic activity will suffer another major blow.
The central role in this regard will also be played by China. The good news is that thanks to the improved epidemiological situation, the major Chinese cities of Beijing and Shanghai began to relax Covid controls over the weekend. The relaxation of restrictions comes about two months after Shanghai ordered people to stay in their apartments for mass testing for the virus.
In the case of monetary policy, Moody’s fears that the full effects of a tightening of monetary policy will begin to be felt at the same time that consumer demand has already declined. The impact of a simultaneous increase in interest rates and reduction in central bank balance sheets may be less favorable.
Finally, Moody’s points to risks associated with changes in the global order due to competition and geopolitical restructuring. The rise of China and emerging markets in the global population, economy and financial flows has strengthened their position on the international stage. At the same time, geopolitical differences have intensified in the last two years, pitting China and Russia against the United States and other Western powers.
