Sergio Rossi, professor of macroeconomics and monetary economics at the University of Fribourg, Switzerland, told Sputnik that the Federal Reserve’s decision to continue raising interest rates will lead to a “hard recession” in the near future.
Rossi admitted that the Fed's decision was “not surprising” as the US has yet to hit its goal of 2% inflation, but that it “will negatively affect the US as well as the global economy” after banks and other financial institutions “record an increasing number of non-performing loans” that cause them to default on their debts.
Instead of taming inflation, Rossi said the increase of the federal funds rate to 5.25-5.5% will increase the measured rate of inflation.
“An increasing number of small and medium-sized firms will increase their prices as a result of banks charging a higher rate of interest to these firms’ loans,” Rossi told Sputnik, adding that this will “reduce the volume of new consumer loans, thereby reducing households’ expenditures.”
The decision to increase interest rates will further lead to an appreciation of the US dollar in the foreign exchange market, negatively impacting US exports.
“All these factors will reduce the level of firms’ investments in the US economy,” Rossi said, noting it would negatively affect the labor market for “both employment and the wage level of … middle-class workers, who will therefore reduce [their] level of consumption.”
That, Rossi said, may cause a “vicious” cycle that pushes the US into a “hard recession,” which will inevitably spread to other Western economies already suffering from inflation caused by the COVID-19 pandemic and Western sanctions on Russia.
The US and other Western countries are using “totally wrong macroeconomic analysis” that will only exacerbate their economic issues. Instead, Rossi advises they target companies who have been taking advantage of raw material shortages to increase prices needlessly.
“No increase in the policy rate of interest will ever be able to address this so-called ‘greedflation,’ which can only be averted with a higher taxation of profits,” Rossi added.